The Financial Crisis in Central and Eastern Europe: the Measures and Determinants of the Exchange Market Pressure Index and the Money Market Pressure Index

Abstract

This paper discusses how the global financial crisis has affected the formation of exchange rates and interest rates in three major Central and Eastern European countries: Poland, the Czech Republic and Hungary. Two main channels of the transmission of the crisis are considered: the exchange rate channel, measured by the exchange market pressure index (EMP), and the interest rate channel, measured by the money market pressure index (IMP). Two key results are achieved by using panel regressions. First, during the recent crisis the interest rate channel was controlled by authorities, who left the exchange rate to be the absorber of the imbalances created before the crisis. Second, even though the crisis transmitted through to the banking sector, monetary and external imbalances contributed to the vulnerability of the countries analysed here. The government sector seems to have had a minor role in creating the conditions for the crisis, while it played a central role in taming the effects of the crisis.