Offshore Markets for the Domestic Currency: Monetary and Financial Stability Issues
We show in this paper that offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. We argue that, for emerging market economies that are interested to see some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency, while still allowing the authorities to retain a measure of control on the pace of capital account liberalisation. The development of offshore markets could pose risks to monetary and financial stability in the home economy, which need to be prudently managed. Experience in dealing with the Euromarkets by the Federal Reserve and other authorities of the major reserve currency economies show that policy options are available for managing such risks.
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