A var analysis of exchange market pressure : a case study for the mena region

Abstract EN

Recent currency crises in Asia and Latin America have once again raised the question of how policymakers can successfully defend exchange rates.

In a managed exchange rate regime, exchange rate pressure can be translated into nominal devaluation and / or loss in international reserves.

To capture this pressure, the exchange market pressure (EMP)- the sum of exchange rate depreciation and reserve outflows (scaled by base money)- was calculated and tested by a vector autoregression (VAR) framework for those MENA region countries (Egypt, Tunisia, and Turkey) adopting managed floating exchange rate regimes.

The VAR framework enables us first to test whether contractionary policy- either a rise in real interest rate differential or a decrease in net domestic credit- has the expected effect on the exchange market pressure; and, second, to reckon how monetary authority uses its available short-term monetary tools to ease an increase in EMP.