Searching for indicators of foreign exchange market pressure: evidence from Greece

✍ Scribed by Costas Karfakis; Demetrios Moschos

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 188 KB
• Volume: 4
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/(sici)1099-1158(199901)4:1<63::aid-ijfe88>3.0.co;2-k

✦ Synopsis

The purpose of the present study is to search for indicators that might give an early warning of a foreign exchange market pressure in Greece, by means of a vector autoregression. The framework of analysis is also used to assess the relative importance of the associated shocks as sources of fluctuations in the foreign exchange market pressure index. The literature has suggested alternative signals to watch for, such as the real exchange rate overvaluation, the vulnerability of the financial system, a low level of foreign reserves relative to domestic liquidity, the current account balance, the net capital movements, etc.

An interesting aspect of the Granger causality results is the evidence that the real overvaluation of the drachma, the reserves adequacy ratio, the current account balance and the net capital movements have predictive power with respect to the foreign exchange market pressure. The results of variance and historical decompositions show that shocks attributable to real overvaluation, the reserve adequacy ratio and the net capital movements are the dominant sources of volatility in the foreign exchange market pressure index.