Developing and testing measures of exchange market pressure for three emerging Asian economies

This thesis uses the concept of exchange market pressure (EMP) - which is a measure of ex ante external imbalance in the foreign exchange market – to examine external disequilibrium in three emerging Asian economies, namely China, India and Vietnam, vis-a-vis the US Dollar over the last two decades. A new model of EMP is developed, which differs from previous measures in that we use a balance of payments model to derive a measure of exchange market pressure, rather than the traditional stock adjustment, money market model, explicitly allowing for imperfect capital mobility, which is important for our sample of countries. The new measure postulates that exchange market pressure can be explained by domestic and foreign incomes, real depreciation and the change in the short-term interest rate differential. The empirical analysis further extends the model to consider US central bank intervention, represented by a QE-adjusted measure of US policy stance, and domestic and US economic policy uncertainty (EPU). We find that in addition to the previous variables, US policy stance as well as EPU are significant drivers of EMP in China, India and Vietnam.