same ones to subsequently experience large and sometimes uncomfortable real exchange rate reversals.

In addition, countries with larger financial markets, measured here by the magnitude of external financing, experienced larger exchange rate depreciation and reserve losses. As mentioned above, this may indicate that it was easier to rebalance portfolios by withdrawing from a few larger markets than to rebalance portfolios by selling assets in smaller markets. It suggests that having a large financial market that is attractive to foreign investors may be somewhat of a mixed blessing under these circumstances. Note, as mentioned above, that we consider several different measures of the size of the market, the portfolio liability stock from Lane and Milesi-Ferretti, stock market capitalization, aggregate GDP, etc. These are correlated with each other and give similar results in the regressions (see Appendix C). These results imply that the larger markets are more prone to the effects of liquidity retrenchment. In contrast, the stock of reserves held in the previous period does not appear to be associated with the effect on exchange rate or on the composite indices of exchange rate and reserves.

**Table 5: Factors Associated With Exchange Rate Depreciation and Market Pressure Indices, April-August 2013**

|**Dependent Variable**|**%**<br>**change in**<br>**Nominal**<br>**Exchange**<br>**rate**|**Index I:**<br>**Exchange**<br>**rate,**<br>**Reserves**|**Index II:**<br>**Exchange**<br>**rate,**<br>**Reserves,**<br>**Stock**<br>**Prices**|**%**<br>**change in**<br>**Nominal**<br>**Exchange**<br>**rate**|**Index I:**<br>**Exchange**<br>**rate,**<br>**Reserves**|**Index II:**<br>**Exchange**<br>**rate,**<br>**Reserves,**<br>**Stock**<br>**Prices**|
|---|---|---|---|---|---|---|
||(1)|(2)|(3)|(4)|(5)|(6)|
|Increase in Current Account|||||||
|Deficit in 2010–12, over 2007–09|0.25**|0.17*|0.33***|0.21**|0.07|0.23**|
||[2.58]|[1.77]|[3.27]|[2.18]|[0.74]|[2.45]|
|Avg. Annual % Change<br>in RER, 2010–2012||||-0.37***|-0.35***|-0.54***|
|||||[2.82]|[3.21]|[3.66]|
|Size (Private External Financing,|||||||
|2010–12, Log)|1.42***|0.71**|0.58|1.20***|0.55**|0.23|
||[3.85]|[2.65]|[1.19]|[3.16]|[2.15]|[0.41]|
|Reserves/M2 Ratio, 2012|-2.53|1.52|4.32|-1.15|1.45|4.88|
||[0.73]|[0.46]|[1.03]|[0.40]|[0.51]|[1.43]|
|Observations|45|43|32|43|41|30|
|R-squared|0.43|0.24|0.29|0.49|0.36|0.43|
|Adj. R-squared|0.39|0.19|0.21|0.44|0.29|0.34|

Note: An increase in real exchange rate (RER) is depreciation; we take average annual percent change in RER during 2010, 2011 and 2012. Current account deficit (CAD) is current deficit as percent of GDP; we take average annual increase in CAD during 2010–12 over 2007–09. Robust t statistics are in parentheses. *** indicates the coefficients are significant at 1 percent level, ** indicates significance at 5 percent, and * significance at 10 percent level.

In Table 6 we include the additional explanatory variables, focusing first on the extent of exchange rate depreciation as the dependent variable. We consider economic growth, the fiscal deficit, public debt relative to GDP and inflation as indicators of aggregate economic policy and 11