![]() What results do these relatively novel DPCA measures provide, when applied to our model? We generate GIRFs for our Latin American, Central/East European, and Asian vectors in Figures 2-4. Table 4: VAR Granger Causality/Block Exogeneity Wald Tests: Asia Table 3: VAR Granger Causality/Block Exogeneity Wald Tests: Central and Eastern Europe. Clearly, the DPCA measure of EMP is not a reliable alternative to the traditional ERW measure until the technique is further refined. stocks, but these are exactly reversed when the DPCA measure is used. Poland’s ERW measure, to name one example, registers a spillover from world commodity prices but not U.S. Tables 2-4 show that the differences also persist when VAR models are estimated that use each EMP measure. Here, however, we use the Generalized VAR approach of Pesaran and Shin, which is invariant to the ordering of the variables. Traditionally, the variables are placed in order of endogeneity, as per the “orthogonal” VARs of Sims. Since all IRFs’ results depend on the ordering of the variables in a VAR, a choice must be made regarding this issue. Examining the timeseries plots, basic descriptive statistics, and Granger causality tests, we can assess how each series pair differs, and whether one series is more sensitive and more likely to point to a currency “crisis.”įinally, we generate Impulse Response Functions (IRFs) for the DPCA vectors to address how each EMP series responds to shocks to the other variables. This allows us to conduct Granger causality tests for spillovers. We do this separately for the ERW and DPCA measures, for a total of six vectors. Standard and Poor’s stock index to capture external events. This vector also includes world commodity prices and the U.S. The second measure, using DPCA, assigns time-varying weights to the same three components.įollowing Hegerty for each of the three geographic areas, we enter all relevant countries’ EMP series in a single regional vector. Reserve losses are scaled by the lagged monetary base, and each interest-rate differentials (money market rate) are, like nominal exchange rates, taken vis-à-vis the U.S. The ERW measure is calculated as per Equation (1): Using monthly data from the International Financial Statistics of the International Monetary Fund, we generate two EMP series for each of 19 countries over the period from 2001 m01 to 2009 m08. ![]() We conclude that DPCA is not statistically superior to the much-criticized ERW measure. Calculating DPCA measures for 19 emerging markets in Latin America, Central Europe, and Asia, we find that these often differ greatly from a parallel ERW measure both in terms of the properties of the data series and the results of a basic estimation. This study can be considered a brief extension of Hegerty, except that here, the Dynamic Principal Components Analysis of Forni et al. So far, no study has come up with a credible alternative to the ERW measure of EMP. Secondly, when the second or third component is used in empirical analyses and compared with the ERW measure, “crisis” periods and estimation results differ. First, in no case is the first principal component valid, since the weights are often of the “wrong” sign. ![]() ![]() In a more detailed study, Hegerty uses PCA to generate monthly EMP series for 21 countries. apply Principal Components Analysis (PCA) to assign weights, without much success. In the most common EMP measure, Eichengreen, Rose and Wyplosz, (hereafter referred to as ERW) simply deflate each of three components-they also include interest-rate increases-by its own standard deviation so that the most volatile component will not dominate the series. Girton and Roper assigned equal weights to currency depreciations and reserve losses, while Weymark estimated a structural model to calculate them. Most are not based on underlying theory and may be biased. One criticism of the calculation of EMP measures is the weighting scheme for each component. Extreme values are deemed to be “crisis” periods, with a binary variable equaling one during these times, although continuous EMP measures are also used in econometric studies. A weighted measure of both possibilities is termed an Exchange Market Pressure (EMP) Index. In studies of currency crises, “crisis” episodes are often calculated as periods in which a currency depreciates or a central bank intervenes to defend it. ![]()
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