Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331351 
Year of Publication: 
2025
Series/Report no.: 
IES Working Paper No. 13/2025
Publisher: 
Charles University in Prague, Institute of Economic Studies (IES), Prague
Abstract: 
This paper contributes to the existing literature on exchange rate modelling by developing a new proxy for foreign exchange market imbalances. By utilizing the monetary presentation of the Balance of Payments we create a measure of net external flows and study its impact on the exchange rate. Focusing on the case of the Czech Republic, we account for the coexistence of fixed and floating exchange rate regimes by relying on the exchange market pressure (EMP) index. A vector autoregression model provides evidence of a causal relationship from net external flows to the EMP index. We find that a positive orthogonal shock to net external flows causes the Exchange rate to appreciate already in the short term with the effect peaking three months after the initial shock.
Subjects: 
Foreign Exchange
Exchange Rates
Capital Flows
JEL: 
F31
F32
F37
F41
G15
Document Type: 
Working Paper

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