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in figures 2.1 and 2.2 because neglect the stochastic part in the loss function. Targets are only hit when the number of variables in the loss function matches the number of instrumental variables. This cannot occur in this model of two variables: output and inflation, and only one instrumental variable that interest rate. Calibrating the inflation weight in the loss function (i.e. making ) shows that the countries can approach more approach more closely the inflation target at the expense of the output target.

2.5 EXCHANGE MARKET PRESSURE AND INTERVENTION ACTIVITY IN CHILE

Using the index proposed by Weymark for small open economies, Emanuel-Werner Kohlscheen computes exchange market pressure and intervention indexes for Chile in the period 1990 to 1998. This statistic can be used to access timing and scale of currency crises, as include exchange rate and variations in one single indicator. The index is suited for intermediate exchange rate policies, since it gives due consideration to the possibility of accommodating exchange market pressures through changes in domestic credit. The monetarist model developed suggests low effectiveness of controls in affecting the exchange rate level, when the interest rate-elasticity of money demand is low. Substantial appreciative pressure on the Chilean peso is found over the period, with the exception of isolated quarters following the introduction of the reserve requirement and following outset of Asian crisis. (Emanuel-Werner Kohlscheen, 2000)

Exchange market pressure is defined for a small open economy model (assumed to be the case of Chile in the period under study). Eq. (2.27) is the money demand expression in the log-linear form, with exogenous output, where clearing of the money market is assumed.

Eq. (2.27)

The price is dependent on the external price level and the nominal level of the exchange rate.

Eq. (2.28)

The financial assets are perfect substitutes. The existence of a reserve requirement for each unit of capital inflow increases the cost of external financing, so that the uncovered interest parity condition is changed to incorporate this additional cost. For the sake of simplicity, all the deposit is assumed have the same maturity as reserve requirement period. This means that the external financing cost is increased from to . Thus, the difference is the cost of the reserve requirement.

Eq. (2.29)

Eq. (2.30) states that changes in the money supply can occur due to changes in domestic credits or changes in the level of international reserves while Eq. (2.31) expresses the response function to changes in the exchange rate.

Eq. (2.30)

Eq. (2.31)

is a policy choice that determines the extent to which exchange market pressure is absorbed by monetary authority interventions. In a free floating exchange rate regime, would be zero, so that there is no smoothing of the exchange rate level at all, while in a fixed regime would be infinite.

Substituting Eq. (2.27) and Eq. (2.28) in Eq. (2.29) and taking the first differences:

Eq. (2.32)

Now, substituting Eq. (2.30) and Eq. (2.31) in Eq. (2.32), and assuming that money market clears yields:

Eq. (2.33)

The term inside the brackets represent the excess demand for currency that originates exchange本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。