Financial Market Integration and Exchange Rate Policy

By Liliana Rojas-Suárez, Donald J Mathieson

January 1, 1990

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Liliana Rojas-Suárez, and Donald J Mathieson. Financial Market Integration and Exchange Rate Policy, (USA: International Monetary Fund, 1990) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines how a country’s exchange rate policy should be adjusted when the degree of integration between domestic and external financial markets increases as a result of both domestic financial liberalization and the relaxation of capital controls. As the financial structure is opened and liberalized, the optimal scale of exchange market intervention changes as the relative importance of different domestic and foreign shocks for output and price stability is altered. Nonetheless, the response of the optimal degree of intervention to increases in the variances of the various domestic and foreign shocks is similar across all financial structures.

Subject: Balance of payments, Capital controls, Credit, Demand for money, Exchange rate arrangements, Exchange rate policy, Exchange rates, Foreign exchange, Money

Keywords: Capital controls, Credit, Credit rationing, Excess demand, Exchange market intervention, Exchange rate appreciation, Exchange rate arrangements, Exchange rate policy, Exchange rates, Financial system, Goods market, Interest rate shock, Intervention parameter, Intervention strategy, Loan rate, Monetary base, North America, Northern Europe, Optimal exchange market intervention, Risk premium, WP

Publication Details

Pages:

66
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1990/002
Stock No:

WPIEA0021990
ISBN:

9781451930979
ISSN:

1018-5941

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