Abstract
This paper estimates a model of exchange market pressure for several EU currencies vis-à-vis the German mark over the period 1980–94. It differs from previous work in that we use principal components analysis to derive a measure of exchange market pressure, rather than adding exchange rate and reserves changes or using ad hoc weighting schemes. Secondly, we also try to explain movements in our measure of exchange market pressure by a wealth-augmented monetary model. The results suggest that exchange market pressure can indeed be explained by differential money growth, the change in the long-term interest rate differential, real depreciation, budget deficit and the current account for five members of the EU's Exchange Rate Mechanism.
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