THE MONETARY APPROACH TO EXCHANGE MARKET PRESSURE: AN APPLICATION TO THE PERUVIAN EXPERIENCE (RESERVES)

ROSEMARY THOMAS, Fordham University

Abstract

The dissertation examined the validity of the monetary model of exchange market pressure and the corresponding policy implications through an empirical investigation of the recent Peruvian experience. The model attempts to explain the rate of change in a nation's stock of international reserves and the rate of change in the nation's exchange rate, simultaneously, in terms of a disequilibrium in the money market.^ In order to test both the accuracy of the model and the usefulness of the model for policy prescriptions, it was applied to Peru on both an annual and a quarterly basis. The model was applied to Peru annually for the years 1961 to 1980 and quarterly from the second quarter of 1975 to the second quarter of 1982. The primary data sources were the Central Bank of Peru and the International Monetary Fund's Internatonal Financial Statistics. Estimation was done using ordinary least squares regression analysis.^ In addition to an econometric test of the model, rigorous econometric tests of chief criticisms of the model were performed. The chief criticisms of the model surround the realism of the assumptions: the specification and stability of the money demand function, the existence of purchasing power parity, the direction of causality between international reserves and domestic credit, and the exogeneity of the growth rate of real Peruvian income, the rate of change in domestic credit, and exchange market pressure.^ In general, the results of the econometric tests indicate that the model accurately explains the rate of change in international reserves and the rate of change in the exchange rate of Peru. However, due to the weakness of the results of the test when the model and its assumptions was performed on a quarterly basis, the model offers little in terms of policy prescriptions to help Peru with international reserve and exchange rate problems. The only policy actions available to the domestic monetary authorities facing exchange rate or international reserve problems would be to help speed the adjustment process whenever there is disequilibrium in the money market. ^

Subject Area

Finance

Recommended Citation

THOMAS, ROSEMARY, "THE MONETARY APPROACH TO EXCHANGE MARKET PRESSURE: AN APPLICATION TO THE PERUVIAN EXPERIENCE (RESERVES)" (1984). ETD Collection for Fordham University. AAI8506362.
http://fordham.bepress.com/dissertations/AAI8506362

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