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Exchange Market Pressure: Some Caveats In Empirical Applications

Simone Bertoli (), Giampiero Gallo () and Giorgio Ricchiuti ()

Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"

Abstract: The Exchange Market Pressure (EMP) Index, developed by Eichengreen et al. [1994], is widely used to study currency crises as a tool to signal whether pressures on a currency are softened or warded off through monetary authorities’ interventions or whether a currency crisis has originated. In this paper we show how the index is sensitive to some assumptions behind the aggregation of the information available (exchange rates, interest rates and reserves), especially when emerging countries are involved. Specifically, we address the way exchange rate variations are computed and the impact of different definitions of the reserves, and we question the constancy of the weights adopted. These issues compound with the choice of a fixed threshold when crisis episodes are identified through EMP. As a result, the dichotomous crisis variable thus derived when adopted as a dependent variable may lead to varied results in subsequent econometric analysis.

New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
Date: 2006-10
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Journal Article: Exchange market pressure: some caveats in empirical applications (2010) Downloads
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