Exchange Market Pressures During the Financial Crisis: A Bayesian Model Averaging Evidence

27 Pages Posted: 5 Jul 2013

See all articles by Martin Feldkircher

Martin Feldkircher

Oesterreichische Nationalbank (OeNB)

Roman Horvath

Charles University in Prague; IOS Regensburg; Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG); University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Marek Rusnák

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: May 29, 2013

Abstract

In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the global financial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-infation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures.

Keywords: exchange market pressures, financial crisis

JEL Classification: F31, F37

Suggested Citation

Feldkircher, Martin and Horvath, Roman and Rusnák, Marek, Exchange Market Pressures During the Financial Crisis: A Bayesian Model Averaging Evidence (May 29, 2013). BOFIT Discussion Paper No. 11/2013, Available at SSRN: https://ssrn.com/abstract=2289755 or http://dx.doi.org/10.2139/ssrn.2289755

Martin Feldkircher (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Roman Horvath

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

IOS Regensburg

Landshuter Str. 4
Regensburg, 93047
Germany

Université de Nice Sophia Antipolis - Groupe de Recherche en Droit, Economie et Gestion (GREDEG)

250, rue Albert Einstein
Valbonne, 06560
France

University of Saint Etienne - Analysis Group and Economic Theory Lyon St-Etienne (GATE-LSE)

Lyon
France

Marek Rusnák

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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