Foreign exchange market asymmetries in Pacific small island developing states: Evidence from Fiji

Abstract

After abandoning Bretton Wood, the foreign exchange market has been dominated by three types of economies: export‐oriented economies (China and other Asian countries), commodity economies (Australia, New Zealand, Canada, and oil exporting nations) and reserve‐currency economies (US, EU, UK, and Swiss). As a result, the asymmetric development of the foreign exchange market has reduced the monetary and fiscal space for PSIDS, which face structural challenges such as a low population base, import dependence, aid dependency, climate risk, and political uncertainty. The ‘Exchange Market Pressure Index’ (EMPI) for Fiji is developed in this article to quantify the pressure on the exchange rate and monetary authorities' responses to micromanaging balance sheet impacts. The calculated EMPI accurately reflects four instances of financial distress in Fiji, including significant exchange market pressure in response to growing trade deficits and external debt, the global financial crisis's contagion effect, and political uncertainty. Our EMP Index's robustness is attributed in part to the employment of a dynamic time series estimate method, a time‐varying weighing scheme, and a high‐frequency monthly dataset.

Currencies of greater interest for central Asian economies: an analysis of exchange market pressure amid global and regional interdependence

“…Few studies have also used econometric models to study the interaction of EMP with its determinants and other macroeconomic variables of an economy such as interest rate changes, net exports, credit growth and capital control. There are cross country studies as well as country-specific (Jain et al 2022 ). Exchange Market Pressure as a dependent variable has been used in prominent studies such as Gelos and Sahay ( 2001 ), Pentecost et al ( 2001 ), Horen et al ( 2006 ), van Poeck et al ( 2007 ), Patnaik et al ( 2017 ), Ahmed et al ( 2017 ) and Patnaik and Pundit ( 2019 ).…”