Analysis of an unannounced foreign exchange regime change

Abstract

Starting in 2004 the Guyanese foreign exchange rate has been remarkably stable relative to earlier periods. This paper explores the reasons for the stability of the rate. First, the degree of concentration in the foreign exchange market has increased, thus making the task of moral suasion relatively straightforward once this policy tool comes to bear on the dominant trader (s). Second, long-term or non-volatile capital inflows make the exchange rate less susceptible to sudden reversal. Third, commercial banks, the dominant foreign exchange traders, have large outlays of assets in domestic currency, thus their desire for exchange rate stability. The econometric exercise is consistent with the notion that trader market power has contributed to lower volatility in the G$/US exchange rate. The paper also presents a model that analyzes monetary policy effects in the presence of a mark-up or threshold interest rate.

The foreign exchange regime in a small open economy: Armenia and beyond

“…Adding further complexity is the role of trader market power to ensure foreign exchange market stability with a dominant financial institution as the primary trader (e.g. Khemraj and Pasha, 2012a).…”