۱٫ Introduction

۲٫ Literature review

۳٫ Methodology of analysis

۴٫ Empirical data and analysis

۵٫ Conclusions

References

Abstract

In this study, structural vector autoregression (SVAR) models are used to analyze the asymmetric effects of external and internal economic factors on the exchange market pressure index (EMPI) in the Czech Republic, Iceland, Poland, and Russia. Along with the forecast error variance decompositions (FEVDs) of the SVAR models and slope-based asymmetry tests suggesting that there may be asymmetric effects on EMPI, impulse response functions (IRFs) of SVAR models for the Czech Republic and Poland indicated that improvements in the current account balance will reduce the exchange market pressure (EMP), whereas deterioration of the current account balance may create a more serious speculative attack potential in Iceland and Poland, due to the high ratio of debt to GDP. Changes in inflation may have significant asymmetric effects on the EMP; more precisely, it was found that high inflation and the interest rate environment will increase the pressure on the exchange rate in all four economies. My findings indicate that decreases in inflation rates did not reduce the EMPI in Iceland and Russia, whereas the decline in interest rates did not constitute the necessary environment for capital inflows in any of the four countries. It is also implied that, due to the changes in long-term interest rates, the formation of the expectation of depreciation of the home currency is easier than the formation of the expectation of appreciation. Furthermore, I reveal that credit conditions in the United States of America (USA) could affect global crisis expectations and thus have asymmetrical effects.

Introduction

In terms of analyzing the factors leading to variations in exchange rates, it has become critically important to study the role of international spillovers, especially after global financial crisis (GFC) and the quantitative easing policy of major central banks. In the post-crisis period, the implementation of economic policies both in developed and developing countries focused on improving their deteriorated macroeconomic economic conditions. Along with internal and external macroeconomic factors, the need for foreign funds and international capital flows has come the core of the analysis of exchange rate fluctuations, especially in developing countries. In this respect, it is critically important to understand the dynamics of the foreign exchange market to make more precise explanations about the effects of exchange rate changes in future periods. Herein, the exchange rate pressure index (EMPI) has been recognized as a leading indicator of the current state of the foreign exchange market and the future value of the exchange rate. According to Weymark (1995), exchange market pressure (EMP) measures the total excess demand for an exchange rate change that would have been required to remove this excess demand in the absence of foreign exchange intervention (FXI). Because FXIs and interest rate adjustments can be used as policy tools to decrease the EMP in developing countries, the definition of EMP has been modified. In particular, the EMPI can be defined as the summation of weighted changes in official reserves, nominal exchange rate, and interest rates (Jing, 2015). There have been many studies in the literature focusing on using different EMPI definitions and analyzing the macroeconomic and financial variables as determinants of the EMPI (Aizenman & Binici, 2016; Aizenman & Hutchison, 2012; Aizenman, Lee, & Sushko, 2012; Akram & Byrne, 2015; Feldkircher, Horvath, & Rusnak, 2014; Panday, 2015; Soe & Kakinaka, 2018). However, exchanges rates can interact with many domestic macroeconomic and financial variables, meaning that models analyzing the factors influencing EMP can be enhanced by the inclusion of domestic economic risk factors (Forbes, Hjortsoe, & Nenova, 2018). In this way, exogenous exchange rate shocks can be taken into consideration in the analysis of EMP. For this purpose, credit default swap (CDS) or the three-month LIBOR based on the US dollar minus three-month Treasury bill (TED spread), which is under the influence of both monetary and fiscal policy implementation, can be included in an empirical model as the main country risk indicators. Due to the spillover effects of the monetary policy of the US after the GFC, the inclusion of macroeconomic and financial variables of foreign countries in models examining the variations in exchange rates has also gained ground in the most recent scientific literature (Adler, Lama, & Medina, 2018; Belke & Fahrholz, 2018; Jordan, 2016).