1. The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance DISSERTATION PAPER Exchange Market Pressure and Central Bank Intervention MSc. Student: MATEI SEBASTIAN Supervisor: Prof. MOISĂ ALTĂR Bucharest, July 9, 2001

2. Introduction Review of the concepts Theoretical model Empirical estimation Practical considerations

3. Central bank intervention sterilized intervention unsterilized intervention Exchange Market Pressure measure of the disequilibrium in the foreign exchange market REVIEW OF THE CONCEPTS (1)

4. Model independent definition of exchange market pressure, Weymark (1998): Model independent definition of exchange market pressure, Weymark (1998): Exchange market pressure measures the total excess demand for a currency in the foreign exchange market as the exchange rate that would have been required to remove this excess demand in the absence of exchange market intervention, given the expectations generated by the exchange rate policy actually implemented.. REVIEW OF THE CONCEPTS (2)

5. THEORETICAL MODEL (1) money demand equation: domestic inflation equation: uncovered interest rate parity condition: money supply equation:

6. THEORETICAL MODEL (2) monetary policy reaction function: exchange rate policy reaction function: money market equilibrium:

7. THEORETICAL MODEL (3) system specification of the model: solving for exchange rate change gives: where:

8. THEORETICAL MODEL (4) definition of excess demand for currency: exchange rate change becomes: it leads to the following first order difference equation: solving forward results: where  k is a combination of the parameters of the model.

9. THEORETICAL MODEL (5) using Weymark(1998), we define exchange market pressure as : which can be written as: where the conversion factor is: the degree of central bank intervention is:

10. EMPIRICAL ESTIMATION (1) money demand equation: domestic inflation equation: money supply equation:

11. EMPIRICAL ESTIMATION (2) estimation method: two-stage least squares candidates for the role of instrumental variables: -one period lagged values of endogenous variables -one period lagged values of endogenous variables -present and one period lagged values of exogenous variables -present and one period lagged values of exogenous variables the selection of the instrumental variables is based on the statistical significance of the candidate variables in the regression of the endogenous variables on all the candidate variables the following set of instrumental variables resulted:

12. EMPIRICAL ESTIMATION (3)

13. EMPIRICAL ESTIMATION (4)

14. EMPIRICAL ESTIMATION (5)

15. PRACTICAL CONSIDERATIONS (1) the coefficients needed to determine the conversion factor are: the conversion factor consistent with our model is: alternative measure for the conversion factor (Eichengreen, Rose and Wyplosz (1995)):

16. PRACTICAL CONSIDERATIONS (2)