Research Discussion Papers, Bank of Finland
No 4/1997:
Estimating Exchange Market Pressure and the Degree of Exchange Market Intervention for Finland during the Floating Exchange Rate Regime
Mika Pösö ()
and Mikko Spolander ()
Abstract: In this paper, we use a fairly simple monetary macro model
to calculate the quarterly measures of exchange market pressure and the
degree of the Bank of Finland's intervention during the time the markka was
floated. Exchange market pressure measures the size of the exchange rate
change that would have occurred if the central bank had unexpectedly
refrained from intervening in the foreign exchange market. Intervention
activity of the central bank is measured as the proportion of exchange
market pressure relieved by foreign exchange interventions. According to
the measures, exchange market pressure decreased during the course of the
markka float. Looking at the float as a whole, we cannot say whether
depreciation or appreciation pressure was clearly dominant. However, the
quarterly exchange market pressure was more often negative than positive.
The intervention indices indicate that the Bank of Finland limited the
quarter-by-quarter changes in the external value of markka almost totally
allowing markka to drift slowly towards its underlying free-float
equilibrium value. The estimates of intervention activity during periods of
appreciation and depreciation pressure diverged most in 1994 and 1996. In
1994, depreciation pressure was dampened more carefully than appreciation
pressure. In 1996, on the other hand, the Bank of Finland reacted much more
cautiously to appreciation pressure. Overall, the Bank of Finland's
reactions to appreciation pressure seem to have varied markedly, while its
reactions to depreciation pressure seem to have been more consistent.
Keywords: exchange market pressure; exchange market intervention; floating exchange rate regime; (follow links to similar papers)
27 pages, April 2, 1997
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