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A Small Foreign Exchange Market with a Long-Term Peg: Barbados

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Author Info

  • Travis Mitchell
  • Roland Craigwell
  • DeLisle Worrell

Abstract

This paper is a first analysis of daily transactions in the foreign exchange market of Barbados, a small open economy that has had an unchanged peg to the U.S. dollar for over 30 years. As a result of the credibility of the peg, we expect that capital flows will respond to differentials between U.S. and comparable Barbadian interest rates and that this will result in uncovered interest parity, when allowance is made for market frictions and large discrete events. The results are consistent with this hypothesis about the motivation for foreign exchange transactions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/245.

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Length: 18
Date of creation: 01 Oct 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/245

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Related research

Keywords: Exchange rates; Interest rates; Capital flows; foreign exchange; foreign exchange market; exchange rate; exchange rate changes; foreign exchange transactions; exchange markets; foreign exchange markets; exchange transactions; excess demand; foreign exchange reserves; interbank market; exchange market activity; exchange reserves; exchange rate uncertainty; bank intervention; working capital; exchange rate economics; spot exchange rate; exchange rate stability; bank regulations; fixed exchange rate; exchange rate regimes; bank transactions; bank activity; exchange rate expectations; real exchange rate changes; currency transactions;

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  1. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  2. Sergio L. Schmukler & Graciela Laura Kaminsky, 2003. "Short-Run Pain, Long-Run Gain," IMF Working Papers 03/34, International Monetary Fund.
  3. Koedijk, Kees G. & Lothian, James R. & van Dijk, Mathijs A., 2006. "Foreign exchange markets: Overview of the special issue," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 1-6, February.
  4. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
  5. Kaminsky, Graciela Laura & Schmukler, Sergio L., 2002. "Short-run pain, long-run gain : the effects of financial liberalization," Policy Research Working Paper Series 2912, The World Bank.
  6. International Monetary Fund, 2005. "Adopting the Euro in Central Europe," IMF Occasional Papers 234, International Monetary Fund.
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