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Foreign exchange intervention in a small open economy with a long term peg

Author

Listed:
  • Mahalia Jackman

    (Central Bank of Barbados)

Abstract

Central banks usually intervene in order to calm disorderly market conditions, fix exchange rate misalignments, stabilise erratic short-term exchange rate fluctuations, or quell the excess demand/supply of FX. Under a floating regime, the size and timing of intervention are critical policy decisions. But, in an economy with a fixed exchange rate – such as Barbados – FX intervention tends to be endogenous i.e., it is the FX demand and supply conditions that dictate both the timing and amount of intervention. Against this backdrop, this paper developed a model to investigate how FX market conditions dictate intervention in Barbados, small open economy which has been pegged to the US dollar for over 30 years. Results suggest that market frictions, oil prices and oil price shocks all reduce net purchases of FX, while the seasonal highs in tourism and the differential between domestic and foreign interest rates both increase net purchases.

Suggested Citation

  • Mahalia Jackman, 2012. "Foreign exchange intervention in a small open economy with a long term peg," Economics Bulletin, AccessEcon, vol. 32(3), pages 2207-2219.
    • Handle: RePEc:ebl:ecbull:eb-12-00137
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    References listed on IDEAS

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    Cited by:

    1. Jackman, Mahalia, 2012. "What Prompts Central Bank Intervention in the Barbadian Foreign Exchange Market?," MPRA Paper 41703, University Library of Munich, Germany.

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    More about this item

    Keywords

    FX intervention; fixed exchange rates; small open economy; Barbados;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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