Assessment of asymmetric effects on exchange market pressure: Empirical evidence from emerging countries

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.