Showing papers on "Foreign exchange market published in 1992"

Exchange Rate Economics: A Survey

Abstract: Two main views of exchange rate determination have evolved since the early 1970s: the monetary approach to the exchange rate (in flexible-price, sticky-price, and real interest differential formulations); and the portfolio balance approach. The literature on these views is surveyed, followed by a discussion of the empirical evidence and likely future developments in the area of exchange rate determination. The literature on foreign exchange market efficiency, exchange rates and "news," and international parity conditions is also reviewed.

Institutional Separation between Supervisory and Monetary Agencies

Abstract: This paper investigates whether monetary policy and banking supervision should be separated, or not. It starts with an account of the historical evolution of the Central Banks micro-function (banking supervision). The role of the lender of last resort and the introduction of deposit insurance is discussed. There is currently a diversity of institutional arrangements, but the differences are found to be greater in appearance than in reality. The main argument of divorcing the monetary from the regulatory authority is that the combination of functions might lead to a conflict of interest. This conflict can arise in different ways. The most important instance is that interest rates are held down because of concern with the ¶health¶ of the banking system, when purely monetary considerations suggest higher rates. It is argued that this conflict between ¶regulatory¶ and ¶monetary¶ objectives depends to some extent on the structure of the banking and financial systems (i.e. whether banks are dependent on wholesale or retail markets for short term funding). A First argument against separation is the role of the Central Bank in the payment system, in particular with respect to preventing systemic risk. The massive intra-day credit exposures in large value payment systems could give rise to settlement failure(s), which in turn could generate a systemic crisis. Settlement risk is therefore increasingly an area of supervisory concern for Central Banks. In so far as the Central Bank as lender of last resort is likely to support a failing participant, it is assuming the risks and effectively becoming the implicit guarantor of the system. Although Central Banks implement risk reduction policies, some risks originate beyond the settlement system, e.g. in foreign exchange trading, securities transactions and interbank transactions. It is argued that Central Banks should have a regulatory and oversight role in the payment system, although it does not follow that they should also operate them. Turning to the broader concern of the Central Bank of systemic stability, it is claimed that the Central Bank usually has to use its lender of last resort function not only in cases of liquidity difficulties, but also where the solvency of banks is uncertain. A cross-country survey of 104 bank failures is assembled in an appendix. We focus on the provision of funding for rescues: central bank, deposit insurance, government or other banking system should lie with the agency which pays if, and when , banks are to be rescued. So long as rescue and insurance is undertaken on an implicit Central Bank basis, then the Central Bank would naturally want to undertake regulation and supervision. However, there is a trend towards using tax-payer money for bank rescues which strengthens the case for separation of the monetary and supervisory functions and establishment of a government agency for the latter. It would, however, be difficult to have a complete division, since the Central Bank would generally remain the only source of immediate funding.

Parallel Currency Markets in Developing Countries: Theory, Evidence, and Policy Implications

Abstract: The paper reviews recent theoretical and empirical developments in the analysis of informal currency markets in developing countries. The basic characteristics of these markets are highlighted, and alternative analytical models to explain them are discussed. The implications for exchange rate policy --including imposition of foreign exchange restrictions, devaluation, and unification of exchange markets-- in countries with a sizable parallel market are also examined.

Psychological Barriers in the Foreign Exchange Market

Abstract: This paper undertakes an empirical analysis of the existence of psychological barriers in the dollar/DM and the dollar/yen exchange markets. Psychological barriers occur when agents attach some special importance to the last trailing digits of the price of an asset or a currency. Our empirical results indicate that psychological barriers exist and are significant in the dollar-yen market. Market exchange rates tend to resist movements towards numbers such as 130, 140, ... yen per dollar etc. In addition, once these barriers have been crossed, exchange rates accelerate away from them. The evidence of psychological barriers in the dollar/DM market is less clear-cut.

Foreign Currency Deposits and the Demand for Money in Developing Countries

Abstract: This paper examines the relative demands for domestic and foreign currency deposits by residents of developing countries. A dynamic currency substitution model that incorporates forward-looking rational expectations is formulated and then estimated for a group of ten developing countries. The results indicate that the foreign rate of interest and the expected rate of depreciation of the parallel market exchange rate are important factors in the choice between holding domestic money or switching to foreign currency deposits held abroad. From an empirical standpoint, the forward-looking framework adopted here also turns out to be superior to the conventional currency-substitution model.

Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia

Abstract: A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.

The Iranian Foreign Exchange Policy And The Black Market for Dollars

Abstract: As a result of the oil price shocks, the 1979 revolution, and the eight-year war with Iraq, fundamental changes have taken place in Iran's foreign exchange position as well as in its exchange rate policy. The viable data over the period 1979–1980 to 1988–1989 clearly show that, despite the revolutionary rhetoric, very little has been done to reduce the country's dependence on oil exports as a source of foreign exchange and government revenues. Instead, in the face of falling oil revenues and the country's increasing international isolation, coupled with the regime's unwillingness to incur foreign debt, the government has adopted a severe ‘import compression’ policy through selective tariffs and quotas, strict control of private and government imports by means of import licenses, and the imposition of foreign exchange allocations on government agencies. The result has been an ever-rising premium on the U.S. dollar in the ‘black’ market, a highly overvalued official exchange rate, a substantial increase in rent-seeking activities at the expense of production, a severe misallocation of resources, and loss of output and industrial capacity.

How much to commit to an exchange rate rule : balancing credibility and flexibility

Abstract: The purpose of this paper is to identify the factors which determine the strength of commitment that policymakers choose to back up a fixed exchange rate system. In practice the commitment level is achieved by choosing a particular set of monetary and exchange rate arrangements. The authors develop a Barro-Gordon type model in which the policymaker has to decide how much to commit under uncertainty. An important assumption is that the stronger the commitment to the fixed exchange rate the greater the political cost of reneging on it. Thus, prior to deciding on the choice of exchange rate arrangements the policymaker has to weigh the benefits, to the disinflation program, from making a strong commitment against the potential costs of being forced to renege on it. Some of the more technical details are presented in appendices. The paper illustrates the results of the model with examples from Latin American countries and concludes with a comparison of the results of the authors approach with related work.

When Support/Resistance Levels are Broken, Can Profits be Made? Evidence from the Foreign Exchange Market

Abstract: (The associated paper is significantly revised and new authors have contributed to it) We investigate on three exchange rate series the profitability of signals generated by the breaking of support and resistance identified and supplied by Chartists. Such profitability is assessed, and then compared to ones obtained with other technical rules. We confirm previous findings that trading range breaks do generate profitable signals, even after the inclusion of transaction costs, and we show that signals generated using Chartists inputs are more frequent and profitable. Supports and resistances may work by warning traders against holding currencies subject to adverse trends.

Options on Foreign Exchange

Abstract: Introduction to the Currency Option Market Foreign Exchange Basics Trading Currency Options European Currency Options European Currency Option Analytics Volatility American Exercise Currency Options Currency Futures Options Barrier Currency Options Nonbarrier Exotic Currency Options Bibliography Index.

Unification of Foreign Exchange Markets

Abstract: Exchange rate reforms in developing countries have often aimed at floating the exchange rate in an attempt to unify the official and parallel markets for foreign exchange. This paper examines the short-term dynamics associated with such reforms. The analysis shows that the behavior of the parallel market premium in the periods leading to reform depends crucially on expectations about the postreform policy stance. The paper also draws the implications of the analysis for the behavior of foreign reserves, output, and the real exchange rate.

Benefits from International Diversification: Across Time and Country Perspectives

Abstract: Over the last 20 years, research has confirmed and reconfirmed the benefits of international diversification. [See Madura (1984) for a review of this research.] However, changes in international stock market and foreign exchange market behavior require that some issues be reassessed. First, how do potential gains from international diversification vary across perspectives? Most of the past research focused solely on a U.S. perspective. Solnik (1974) assessed various perspectives, but the period assessed was prior to the inception of floating exchange rates. Because of the high degree of integration of stock markets and the volatility of foreign exchange rales, a reassessment from various perspectives is necessary.

On the Effectiveness of Daily Intervention by the Deutsche Bundesbank and the Federal Reserve System in the US Dollar — Deutsche Mark Exchange Market

Abstract: The purpose of this paper is to test empirically whether interventions by the Deutsche Bundesbank and the Federal Reserve System in the US dollar-Deutsche Mark spot exchange market were effective during the period from February 1985 until August 1988.

Dual and multiple exchange rate systems in developing countries : some empirical evidence

Abstract: The authors examine the determinants of the parallel exchange rate for a cross-country sample of developing countries The sample includes countries in which the parallel exchange rate is official (dual exchange rate systems) as well as those in which it is unofficial (black market) They base their empirical analysis on a portfolio macroeconomic model in which the parallel exchange rate is determined by expectations and equilibrium asset considerations in the short run, but depends on the evolution of key policy variables (such as stock of money, budget deficits, and trade policy) in the long run The results indicate that macroeconomic variables explain more than 70 percent of the variation in the spread between the official and parallel exchange rates The authors cannot reject the hypothesis that there are no differences in the determinants of the spread when the parallel rate is official and unofficial Also, they cannot reject the hypothesis that restrictions on the capital account affect the spread These results are consistent with prior findings that portfolio considerations dominate the determination of the parallel rate in the short run There is evidence that the adoption of dual exchange rate systems only partly insulates domestic prices This insulation may be limited by : 1) a leakage of transactions from the official to the parallel market; and 2) depreciation of the parallel exchange rate

Macroeconomic management and the black market for foreign exchange in Sudan

Abstract: The author uses a simple general equilibrium model to derive a forward-looking linear solution for the premium on the black market for foreign exchange in Sudan. His solution accounts for the long-run fundamentals of the premium that operate through the current account balance. It also accounts for the short-run determinants of the asset market. Estimates based on Sudanese data broadly corroborate the model's predictions. The author's thesis is that successful exchange rate unification and subsequent integration of the parallel market into Sudan's regular economy will require deep fiscal reform and liberalization of trade and exchange rate policies tailored to the pace of macroeconomic reform. His results show that controlling inflation becomes more difficult under high-premium regimes and that higher premiums hurt official exports and tax revenue from foreign trade. A high premium also tends to accelerate capital flight.

The Foreign Exchange and Money Markets Guide

Abstract: Money Markets. Euromarkets and Foreign Exchange. The Euromarkets and Global Financial Integration. Links between Foreign Exchange and Money Markets. The International Financial System. The Euro and the European Monetary Union. Money Market Calculations. Money Market Paper and Bond Calculations. Foreign Exchange Calculations. Forward Contracts: Outrights. Forward Contracts: Swaps. Short Dates. Adjustments. Artificial Currency Units. Financial Futures. The Swap Market. Options Basics. Options Instruments. Risk Issues. Money Market Risk and Interest-Rate Risk. Measurement and Control of Foreign Exchange Risk. Credit and Settlement Risk. Appendices. Index.