Searching for indicators of foreign exchange market pressure: evidence from Greece

Abstract

This paper uses vector autoregressive (VAR) techniques to examine the indicator properties of a number of macroeconomic variables with respect to foreign exchange (FX) market pressure in Greece during the period 1975–1995. The framework of analysis is also used to assess the relative importance of the associated shocks as sources of fluctuations in the FX market pressure index (FXI). The Granger causality results show that the real overvaluation of the drachma, the reserves adequacy ratio, the current account balance and the net capital movements have predictive power with respect to the FX market pressure. The results of variance and historical decompositions show that shocks attributable to real overvaluation, the reserve adequacy ratio and the net capital movements are the dominant sources of volatility in the FXI. Copyright © 1999 John Wiley & Sons, Ltd.