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Analysis of an unannounced foreign exchange regime change

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  • Khemraj, Tarron
  • Pasha, Sukrishnalall

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.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 36 (2012)
Issue (Month): 1 ()
Pages: 145-157

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Handle: RePEc:eee:ecosys:v:36:y:2012:i:1:p:145-157

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Keywords: Exchange rate; Foreign exchange market; Market power;

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  1. Brooks,Chris, 2008. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9780521694681.
  2. Michael J. Sager & Mark P. Taylor, 2006. "Under the microscope: the structure of the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 81-95.
  3. Tarron Khemraj, 2008. "Excess liquidity, oligopolistic loan markets and monetary policy in LDCs," Working Papers 64, United Nations, Department of Economics and Social Affairs.
  4. AfDB AfDB, . "AfDB Group Annual Report 2008," Annual Report, African Development Bank, number 64 edited by Koua Louis Kouakou, 6.
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  6. von Hagen, J├╝rgen & Zhou, Jizhong, 2002. "De facto and official exchange rate regimes in transition economies," ZEI Working Papers B 13-2002, ZEI - Center for European Integration Studies, University of Bonn.
  7. Melvin, Michael & Tan, Kok-Hui, 1996. "Foreign Exchange Market Bid-Ask Spreads and the Market Price of Social Unrest," Oxford Economic Papers, Oxford University Press, vol. 48(2), pages 329-41, April.
  8. Agarwal, Reena & Horowitz, Andrew W., 2002. "Are International Remittances Altruism or Insurance? Evidence from Guyana Using Multiple-Migrant Households," World Development, Elsevier, vol. 30(11), pages 2033-2044, November.
  9. Frost, Peter A, 1971. "Banks' Demand for Excess Reserves," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 805-25, July-Aug..
  10. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, vol. 32(1), pages 70-91, March.
  11. Mohsen Fardmanesh & Seymour Douglas, 2008. "Foreign Exchange Controls and the Parallel Market Premium," Review of Development Economics, Wiley Blackwell, vol. 12(1), pages 72-89, 02.
  12. Xavier Vives, 2001. "Competition in the Changing World of Banking," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 535-547.
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