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  • 1
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    Amsterdam and Rotterdam: Tinbergen Institute
    Publication Date: 2016-04-21
    Description: If there is exchange market pressure (EMP), monetary authorities can use the interest rate and official interventions to offset this depreciation tendency, or they can let the exchange rate change. We introduce a new approach to derive how these three variables should be combined to measure EMP. This approach differs from existing methods, because it is model—free and requires only few assumptions. It implies that the interest rate should be taken in levels, not in the first—difference form typically used, and the level should be taken relative to the interest rate chosen if the country had no external economic objectives. This makes our measure more in line with economic sense. An illustration of EMP measures for the EMS crises in 1992—1993 shows that our adaptation also makes sense in practice.
    Keywords: E58 ; F31 ; F33 ; G15 ; ddc:330 ; EMP ; EMS crisis ; exchange rate regime ; monetary policy ; real interest differential ; temporal aggregation
    Language: English
    Type: doc-type:workingPaper
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  • 2
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    Amsterdam and Rotterdam: Tinbergen Institute
    Publication Date: 2016-04-21
    Description: While virtually all modern models of exchange rate crises recognise that the decision to abandon an exchange rate peg depends on how harshly policy makers are willing to defend the regime, they virtually never model how the exchange rate is defended. In this paper we incorporate both the mechanics of speculation and a defence policy against speculation in the well-known currency crisis model of Morris and Shin (American Economic Review 88 (1998) 587-97). After adding these natural elements, our model outperforms standard currency crisis models at explaining stylised features of speculative attacks. Moreover, our model connects the theoretical currency crisis literature to an empirical literature on exchange market pressure, by bringing together its building blocks: exchange rate changes plus counter-acting defence policies. We use this connection to confirm our model's predictions empirically.
    Keywords: E58 ; F31 ; F33 ; G15 ; ddc:330 ; Exchange Market Pressure ; Currency Crisis ; Global Game ; Währungsspekulation ; Währungskrise ; Wechselkurspolitik ; Devisenmarkt ; Spieltheorie ; Theorie
    Language: English
    Type: doc-type:workingPaper
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