ABSTRACT
Capital movements, including inflows and outflows of foreign direct investment (FDI) and portfolio investment, can put pressure on a country’s currency to appreciate or depreciate unless its central bank intervenes in the foreign exchange market. Such impacts on a currency can be measured using an index of exchange market pressure (EMP), which combines currency depreciations, reserve losses, and interest-rate hikes. This study constructs quarterly EMP indices for a set of Asian countries versus the euro from 1999 to 2019. After examining the time-series properties of these indices, they are entered into a vector autoregressive (VAR) model that includes net capital inflows as well as a set of macroeconomic variables. Of the four countries examined using this method, only Korea registers an increase in EMP following an FDI outflow, while Japan’s and Malaysiay’s EMP indices rise after a reduction in net portfolio inflows. India, however, responds to neither. These countries also react to shocks in such variables as real GDP growth, inflation, the growth rates of government debt and consumer credit, and increases in global commodity prices.
