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On the Effects of Regulation-Induced Forex Market Segmentation in Small Open Economies

  • Alejandro Reynoso

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

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    The central banks of small open economies have to procure the proper operation of the payments system for transactions with the rest of the world. They do so facing the constraint of a limited stock of international reserves. To make ends meet, they usually rely on three instruments: the choice of an exchange rate regime, the regulation of the foreign exchange transactions of commercial banks and general exchange controls. Based on some stylized facts of the Mexican experience of the past three decades, this paper uses a SIMULINK(R) model to show the effects of different institutional constructs on some key nominal variables. For a reasonable set of simulation parameters, it shows that either the complete segmentation of the peso-dollar market or a full integration of both markets are preferable to intermediate arrangements that contemplate some form of partial financial liberalization.

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    File URL: http://ftp.itam.mx/pub/academico/inves/reynoso/02-04.pdf
    File Function: First version, 2002
    Download Restriction: no

    Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0204.

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    Length: 30 pages
    Date of creation: Oct 2002
    Date of revision:
    Handle: RePEc:cie:wpaper:0204
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    1. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
    2. Michael P. Dooley & Menzie Chinn, 1995. "Financial Repression and Capital Mobility: Why Capital Flows and Covered Interest Rate Differentials Fail to Measure Capital Market Integration," NBER Working Papers 5347, National Bureau of Economic Research, Inc.
    3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    4. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    5. Robert P. Flood & Peter M. Garber, 1981. "Gold monetization and gold discipline," International Finance Discussion Papers 190, Board of Governors of the Federal Reserve System (U.S.).
    6. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    7. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
    8. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
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