Exchange market pressure in a small Pacific Island country: a study of Fiji: 1975‐2005

Abstract

PurposeUnder the fixed exchange rate regime Fiji's currency, which is pegged to a basket of currencies of its major trading partners, has been experiencing severe pressures. The purpose of this paper is to study annual exchange market pressure (EMP) over a 31‐year (1975‐2005) period and attempt to determine the factors behind EMP.Design/methodology/approachThe paper employs the autoregressive distributed lag (ARDL) bounds testing procedure, which is applied to a multivariate model covering four variables, namely EMP in index numbers, and budget deficit, domestic credit to private sector and external debt, all the three expressed as percentages of gross domestic product. Additionally, an uncertainty variable is added to the regression analysis with a view to finding out whether political uncertainty has been responsible for speculative attacks on currency. Existence of a cointegration vector is then investigated. It is then followed by Granger‐causality tests in an error‐correction model with view to exploring the short‐ and long‐term relationships between the variables.FindingsThe study findings are: there existed a long‐run relationship between EMP and budget deficit, domestic credit to private sector, external debt and political uncertainty; and EMP was positively related to budget deficit, domestic credit to private sector and external debt as well as speculative pressures exercised by political uncertainty.Originality/valueThe empirical study on EMP in the South Pacific Island countries and in Fiji in particular is the first of its kind. The paper is expected to promote further interest in the studies of currencies of small island countries.