A typology of foreign exchange auction markets in sub-Saharan Africa : dynamic models for auction exchange rates
In this analytical sequel to"A Typology of Foreign Exchange Auction Markets in sub-Saharan Africa", the authors compare the micromanagement of different foreign exchange auctions in sub-Saharan Africa. Multi-unit auctions for foreign exchange were introduced in a number of countries in the 1980s and 1990s, in a transitional step toward a credible, sustainable, unified regime, such as efficient interbank market. But there is little understanding of how auction markets function in sub-Saharan Africa, and there has been virtually no research on the causes of frequent policy reversals or of auction failure. One possible cause of failure -- apart from thin markets, macroeconomic laxity, and vulnerability to terms-of-trade shocks and fluctuations in the disbursement of foreign aid -- is the inappropriate design and management of auctions. The authors estimate models for the microdeterminants of the auction rate, using weekly data on foreign exchange auctions for Ghana, Nigeria, Uganda, and Zambia. Among the policy lessons: 1) Nigeria and Zambia failed to unify and stabilize the exchange rate partly because there was no reserve price rule. When bidders learn such a rule, speculative bidding diminishes. 2) The management of a credible, sustainable reserve price policy requires an efficient secondary market. A simple underlying model, synthesized from the theoretical literature on auctions, specifies the auction rate as a function of fundamental variables and structural shift dummies. The repeated, sequential nature of these multi-unit auctions and the nonstationary nature of most of the auction variables are captured empirically by a cointegrated (error connection) framework. In addition to consistently estimating long-run and short-run parameters of auction fundamentals, the error correction model allows asymptotically efficient testing of three policy hypotheses deriving from auction theory: the competitiveness hypothesis, the effect of uncertainty on the auction-determined rate, and the revenue-equivalence hypothesis. In other words, they used these models to test the impact on the level of the auction rate of increased comptetition among bidders, of the effect of uncertainty (proxied by a volatile supply of foreign exchange), and of different pricing mechanisms.
|Date of creation:||31 Dec 1994|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harstad, Ronald M. & Kagel, John H. & Levin, Dan, 1990. "Equilibrium bid functions for auctions with an uncertain number of bidders," Economics Letters, Elsevier, vol. 33(1), pages 35-40, May.
- Brannman, Lance & Klein, J Douglass & Weiss, Leonard W, 1987. "The Price Effects of Increased Competition in Auction Markets," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 24-32, February.
- Campbell, J.Y. & Perron, P., 1991.
"Pitfalls and Opportunities: What Macroeconomics should know about unit roots,"
360, Princeton, Department of Economics - Econometric Research Program.
- John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
- Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
- John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
- Harris, Milton & Raviv, Artur, 1981. "Allocation Mechanisms and the Design of Auctions," Econometrica, Econometric Society, vol. 49(6), pages 1477-99, November.
- Hansen, Robert G, 1985. "Empirical Testing of Auction Theory," American Economic Review, American Economic Association, vol. 75(2), pages 156-59, May.
- Milgrom, Paul R & Weber, Robert J, 1982.
"A Theory of Auctions and Competitive Bidding,"
Econometric Society, vol. 50(5), pages 1089-1122, September.
- Aron, Janine & Elbadawi, Ibrahim A., 1992. "Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia," Policy Research Working Paper Series 909, The World Bank.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Phillips, P C B, 1988.
"Reflections on Econometric Methodology,"
The Economic Record,
The Economic Society of Australia, vol. 64(187), pages 344-59, December.
- Laffont, Jean-Jacques & Ossard, Hervé & Vuong, Quang, 1991.
"Econometrics of First-Price Auctions,"
IDEI Working Papers
7, Institut d'Économie Industrielle (IDEI), Toulouse.
- Engelbrecht-Wiggans, Richard, 1988. "Revenue equivalence in multi-object auctions," Economics Letters, Elsevier, vol. 26(1), pages 15-19.
- Robert H. Porter & J. Douglas Zona, 1992.
"Detection of Bid Rigging in Procurement Auctions,"
NBER Working Papers
4013, National Bureau of Economic Research, Inc.
- Paarsch, Harry J., 1992. "Deciding between the common and private value paradigms in empirical models of auctions," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 191-215.
- Eric S. Maskin & John G. Riley, 1985.
"Auction Theory with Private Values,"
UCLA Economics Working Papers
359, UCLA Department of Economics.
- Kenneth A. Froot & Maurice Obstfeld, 1989.
"Intrinsic Bubbles: The Case of Stock Prices,"
NBER Working Papers
3091, National Bureau of Economic Research, Inc.
- Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
- Bikhchandani, Sushil, 1988. "Reputation in repeated second-price auctions," Journal of Economic Theory, Elsevier, vol. 46(1), pages 97-119, October.
- Engle, Robert F & Granger, Clive W J, 1987.
"Co-integration and Error Correction: Representation, Estimation, and Testing,"
Econometric Society, vol. 55(2), pages 251-76, March.
- Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
- Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
- Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December.
- McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
- Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, number 9780198288107, May.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1396. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.