Abstract
This study examines the relationship between the exchange market pressure (EMP) and macroeconomic and financial variables for Eastern European countries. The increase/decrease in the EMP influences the probability of a currency crisis, while this phenomenon may negatively/positively affect the foreign trade balance and may obstruct/facilitate foreign debt service in the Czech Republic and Poland due to the need for imported inputs for domestic production. We also consider that the effects of EMP can be asymmetrical and be opposed to regimes changes; furthermore, we find for the Czech Republic, Hungary, and Poland that changes in the EMP may affect the probability of a broad financial crisis.
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I declare that the derived data supporting the findings of this study are available from the corresponding author on request.
Notes
Currency crises generally arise from serious current or anticipated payment imbalances in the reigning exchange rates. More specifically, a currency crisis involves a sudden and steep decline in the value of a nation’s currency, which is generally triggered by a speculative attack. Additionally, the EMPI can be acknowledged as a signal of a currency crisis.
Changes in the long-term interest rates imply debt management and changes in the foreign trade balance provide information about the external financing requirements. Therefore, all these variables can be used to assess macroeconomic and financial stability.
According to the monetary policy classification of the IMF, Bulgaria has implemented a currency board as a monetary policy framework. Romania cannot be included in our empirical exercise, since foreign trade data do not exist in the statistical databases of the IMF and the OECD.
For instance, the effect of an increase/decrease in the EMPI on any macroeconomic variable may not be as much as the decrease/increase in the EMP in terms of the magnitude and direction.
The Qual VAR overcomes the problem that qualitative variables can be used as exogenous regressors in other VARs, such as (Large) Bayesian VAR, Structural VAR and FAVAR. In VARs, qualitative variables are generally used to express the difference between macroeconomic regimes. However, regime choices can be endogenous to the macroeconomic conditions. In this context, Qual VAR models treat qualitative variables endogenously.
If the EMPI is negative/positive, the latent variable takes the values of zero and one, respectively.
Although the conversion factor ρ may reflect any amount of the FXI, which can be seen in Eqs. (1–2), the relevant EMPI eliminates the impact of the FXI on the exchange rates. In other words, at first glance, FXIs can be acknowledged as being considered in the relevant index, while it ignores the FXI.
Monetary policy authorities may consider various exchange rate regimes; accordingly, fixed and floating exchange rate regimes may be implemented by central banks depending on the changing macroeconomic targets. In this respect, the exchange rate can change in float periods, while the FXI is observed in fixed periods.
Within the regression model framework, the data generation process of \(x_{t}\) can both be accepted as asymmetric and symmetric as \(x_{t} = \alpha_{1} + \varepsilon_{1,t}\). The substitution of negative values of \(x_{t}\) with zero forms a censored variable \(x_{t}^{ + }\) which can be defined as; \(x_{t}^{ + } = \left\{ {\begin{array}{*{20}l} x \hfill & {x > 0} \hfill \\ 0 \hfill & {x \le 0} \hfill \\ \end{array} } \right.\).
Our results are robust to other lag lengths, while an alternative ordering of the model variables does not produce significant changes in the models’ results.
Although Qual VAR is useful for making predictions, we also take advantage of this approach by incorporating probabilities derived from the EMPI.
According to the CIA World Factbook, the levels of FDI in the GDP for the Czech Republic, Hungary and Poland are approximately 40%, 107% and 21%, respectively.
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Ozcelebi, O., Tokmakcioglu, K. & Su, E. Revisiting the asymmetric impacts of the exchange market pressure on the inflation, interest rate and foreign trade balance in Eastern Europe. Empir Econ 61, 2517–2538 (2021). https://doi.org/10.1007/s00181-020-01965-6
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DOI: https://doi.org/10.1007/s00181-020-01965-6