Exchange Market Pressure and the Degree of Foreign Exchange Market Intervention: Evidence From Instrumental Variable Technique

Abstract

The paper uses the approach of Weymark (Weymark D.N., 1995) for constructing the exchange market pressure of the paper and intervention index for Pakistan and to account for potential endogeneity. The objective is to evaluate Central Bank’s monetary policy implemented over the given sample period. The results indicate downward pressure and active Central Bank intervention. Intervention index mean value shows that foreign exchange reserves relieved most of the pressure which is consistent with the managed float. Thus our characterization of exchange rate regime based on Central Bank intervention is in conformity with International Monetary Fund (IMF) Reports on Exchange Rate Arrangements and Exchange Restrictions instead of Reinhart and Rogoff (Reinhart, et.al., 2002). The paper is divided into three sections. Section one deals with the introduction of Exchange Market Pressure and the intervention of IMF. Section 2 reviews the relevant literature and Section 3 deals with waymark exchange market pressure and intervention index is presented. Section 4 describes the data and in section 5 empirical results are presented and section 6 concludes.