A Var Analysis of Exchange Market Pressure: A Case Study for the MENA Region

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.