Estimation of the Exchange Market Pressure in the EU4 Countries: A Model-Dependent Approach

Stavarek, Daniel (2006): Estimation of the Exchange Market Pressure in the EU4 Countries: A Model-Dependent Approach. Published in: Investment Management and Financial Innovations , Vol. 4, No. 3 (2007): pp. 80-94.

Abstract

This paper estimates the exchange market pressure (EMP) on currencies of EU4 countries (Czech Republic, Hungary, Poland, Slovakia) during the period 1993-2005. Therefore, it is one of a very few studies focused on this region and the very first paper applying the model-dependent approach to the EMP estimation on these countries. Moreover, the model proposed by Spolander (1999) is used in the paper along with quarterly data. Thus, this paper, tests the suitability of this model for the countries analysed. Regarding the results obtained, EMP is of similar magnitude in all countries except Poland. We found that EMP was significantly lower and less volatile during the periods when a floating exchange rate arrangement was applied than in periods with fixed exchange rates. It implies that unavoidable entry into ERM II (a quasi-fixed regime) could lead to the EMP increase during the period of the exchange rate stability criterion fulfilment. Hence, a revision of the current definition and understanding of the criterion fulfilment is suggested. Since the model estimation was burdened by some factors reducing the estimates validity we also propose some modifications and extensions of the methodology applied.

• Item Type: MPRA Paper
• Institution: Silesian University - School of Business Administration
• Language: English
• Keywords: market pressure; Central Europe; model-dependent approach; exchange rate stability criterion
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

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