Analysis of an unannounced foreign exchange regime change

Khemraj, Tarron and Pasha, Sukrishnalall (2011): Analysis of an unannounced foreign exchange regime change. Published in: Economic Systems , Vol. 36, No. 1 (1 March 2012): pp. 145-157.

Abstract

Starting in 2004 the Guyanese foreign exchange rate has been remarkably stable relative to earlier periods. This paper explores the reasons for the stability of the rate. First, the degree of concentration in the foreign exchange market has increased, thus making the task of moral suasion relatively straightforward once this policy tool comes to bear on the dominant trader (s). Second, long-term or non-volatile capital inflows make the exchange rate less susceptible to sudden reversal. Third, commercial banks, the dominant foreign exchange traders, have large outlays of assets in domestic currency, thus their desire for exchange rate stability. The econometric exercise is consistent with the notion that trader market power has contributed to lower volatility in the G$/US exchange rate. The paper also presents a model that analyzes monetary policy effects in the presence of a mark-up or threshold interest rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: exchange rate, foreign exchange market, market power
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Agarwal, R., Horowitz, A., 2002. Are international remittances altruism or insurance? Evidence from Guyana using multiple-migrant households. World Development 30, 2033-2044.

Balino, T., Enoch, C., Alexander, W., 1995. The Adoption of Indirect Instruments of Monetary Policy. IMF Occasional Paper 126. Washington, DC, International Monetary Fund.

Berger, A., Klapper, L., Turk-Ariss, R., 2008. Bank competition and financial stability. Policy Research Working Paper 4696. Washington, DC, World Bank.

BOG. various years. Annual Report. Bank of Guyana. Georgetown, Guyana.

Brooks, C., 2008. Introductory Econometrics for Finance, 2nd edition. Cambridge University Press, Cambridge.

Calvo, G., 1998. Capital flows and capital market crises: the simple economics of sudden stops. Journal of Applied Economics I, 35-54.

Cleveland, W., 1979. Robust locally weighted regression and smoothing scatterplots. Journal of the American Statistical Association 74, 829-836.

Das, U., Ganga, G., 1997. A retrospect and prospect on the reform of the financial sector in Guyana. Social and Economic Studies 46, 93-129.

Egoume-Bossogo, P., Faal, E., Nallari, R., Weisman, E., 2003. Guyana: Experience with Macroeconomic Stabilization, Structural Adjustment, and Poverty Reduction. International Monetary Fund. Washington, DC.

Enders, W., 2010. Applied Econometric Time Series, 3rd edn. Wiley, Hoboken, NJ.

Fardmanesh, M., Douglas, S., 2008. Foreign exchange controls and the parallel market premium. Review of Development Economics 12, 72-89.

Frost, P., 1971. Banks demand for excess reserves. Journal of Political Economy 79, 805-825.

Galbis, V., 1993. Experience with floating interbank exchange rate systems in five developing countries. IMF Working Paper 93/36. International Monetary Fund.

Ganga, G., 2000. Credit, excess liquidity and monetary policy issues in Guyana. Social and Economic Studies 49, 199-224.

Hagen, J., Zhou, J., 2005. De facto and official exchange rate regimes in Transition economies. Economic Systems 29, 256-275.

IMF, 2006. De facto classification of exchange rate regimes and monetary policy framework. http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm.

Khemraj, T., 2006. Excess Liquidity, Oligopoly Banking and Monetary Policy in a Small Open Economy. PhD Dissertation. New School for Social Research, New York.

Melvin, M., Tan, K., 1996. Foreign exchange market bid-ask spreads and the market price of social unrest. Oxford Economic Papers 48, 329-341.

Sager, M., Taylor, M., 2006. Under the microscope: the structure of the foreign exchange market. International Journal of Finance and Economics 11, 81-95.

Schnabl, G., 2008. Exchange rate volatility and growth in small open economies at the EMU periphery. Economic Systems 32, 70-91.

Thomas, C., Rampersaud, R., 1991. The cambio system of an independent exchange rate float: the case of Guyana. Social and Economic Studies 40, 115-147.

Vives, X., 2001. Competition in the changing world of banking. Oxford Review of Economic Policy 17, 535-547.