Exchange Market Pressure and Monetary Policy in Emerging Market Economies: New Evidence from Treatment‐Effect Estimations

16 Pages Posted: 16 Jul 2015

See all articles by Alexander Erler

Alexander Erler

University of Bayreuth - Chair of Economics I - International Economics and Finance

Steffen Sirries

University of Bayreuth

Christian Bauer

University of Trier; Universität Trier

Bernhard Herz

University of Bayreuth

Date Written: August 2015

Abstract

The way central banks react to exchange market pressure is likely to affect the subsequent economic development and the associated economic costs. In a situation of currency pressure the central bank can in principle decide to let the currency float freely, to maintain the peg or to implement a managed float policy, i.e. a mix of depreciation and intervention. As the central bank's choices are subject to self selection and endogeneity, we use propensity score matching to adequately cope with these methodical challenges. We find that monetary authorities have two options to keep down the economic costs in terms of output, namely stabilizing the exchange rate or letting the currency float freely. In contrast, a managed float under currency pressure is accompanied by the worst possible outcome with an average loss of gross domestic product (GDP) between 5% and 6%.

Suggested Citation

Erler, Alexander and Sirries, Steffen and Bauer, Christian and Herz, Bernhard, Exchange Market Pressure and Monetary Policy in Emerging Market Economies: New Evidence from Treatment‐Effect Estimations (August 2015). Review of Development Economics, Vol. 19, Issue 3, pp. 470-485, 2015, Available at SSRN: https://ssrn.com/abstract=2631286 or http://dx.doi.org/10.1111/rode.12169

Alexander Erler (Contact Author)

University of Bayreuth - Chair of Economics I - International Economics and Finance ( email )

Universitaetsstr. 30
D-95447 Bayreuth
Germany

Steffen Sirries

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Christian Bauer

University of Trier ( email )

15, Universitaetsring
Trier, 54286
Germany

Universität Trier ( email )

Germany

Bernhard Herz

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

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