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

Author

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  • Alejandro Reynoso

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

Abstract

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.

Suggested Citation

  • Alejandro Reynoso, 2002. "On the Effects of Regulation-Induced Forex Market Segmentation in Small Open Economies," Working Papers 0204, Centro de Investigacion Economica, ITAM.
  • Handle: RePEc:cie:wpaper:0204
    as

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    File URL: http://ftp.itam.mx/pub/academico/inves/reynoso/02-04.pdf
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    References listed on IDEAS

    as
    1. 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 148-166, February.
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    3. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
    4. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    5. Chinn, Menzie-D & Dooley, Michael-P, 1997. "Financial Repression and Capital Mobility: Why Capital Flows and Covered Interest Rate Differentials Fail to Measure Capital Market Integration," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(2), pages 81-103, December.
    6. Flood, Robert P & Garber, Peter M, 1984. "Gold Monetization and Gold Discipline," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 90-107, February.
    7. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    8. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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