Estimating Exchange Market Pressure and Intervention Activity

Abstract

Using the index proposed by Weymark (1995) for small open economies, the paper computes exchange market pressure and intervention indexes for Chile in the period from 1990 to 1998. This statistics can be used to assess timing and scale of currency crises, as they include exchange rate and reserves variations in one single indicator. The index is suited for intermediate exchange rate policies, since it gives due consideration to the possibility of accommodating exchange market pressures through changes in domestic credit. The monetarist model developed suggests low effectiveness of controls in affecting the exchange rate level, when the interest rate-elasticity of money demand is low. Substantial appreciative pressure on the Chilean peso is found over the period, with exception of isolated quarters following the introduction of the reserve requirement and following the outset of the Asian crisis.