Exchange market pressure index: The case of Turkey

Central banks intervene to the exchange market in order to reduce volatility of exchange rate or prevent attacks that lead to high volatilities, especially in developing countries. However, each intervention to the exchange market may cause deviation of the value of exchange rate which, is determined by the market. The aim of this study is that calculates pressure on exchange market for Turkey. In this way, exchange market pressure index has calculated by three ways: Girton-Roper, theoretical and model-independent. In this study, the index is constructed according to the theoretical approach. Four equations are employed for deriving exchange market pressure index but estimating two equations, simple money demand function and purchasing power parity, are enough for the calculation of the index. Quarterly data is employed form 1990:01 to 2017:02. Since both equations have an endogenous variable, those are estimated by two stage least square. It is found that especially starting from the last quarter of 1992 to 2002, exchange market pressure index is too high however, after freely floating system was settled then pressure in the exchange market had decreased dramatically. Moreover, this index can be used as a one of indicator for determination of economic crises due to the fact that the volatile the index increased just before each economic and political crisis