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Exchange Market Pressure and Monetary Policy in Emerging Market Economies: New Evidence from Treatment‐effect Estimations
Author(s) -
Erler Alexander,
Sirries Steffen,
Bauer Christian,
Herz Bernhard
Publication year - 2015
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12169
Subject(s) - economics , currency , float (project management) , monetary economics , exchange rate , monetary policy , depreciation (economics) , foreign exchange market , endogeneity , international economics , macroeconomics , microeconomics , profit (economics) , management , capital formation , financial capital , econometrics
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%.