The role of foreign exchange markets and policy reforms in the economy.

Abstract

Foreign exchange market is very important. In emerging market economies, under-development of financial markets leads to goods hoarding and foreign currency accumulation as forms of investment. In this paper, an asset market  model,  supplemented  by  explicit  treatment  of  smuggling  and  second-economy activity, is used for studying the paths of black-market exchange rates, second-economy prices, hoarding stocks, and privately held dollar balances following policy reforms. We discuss conditions for overshooting and related dynamics of exchange rates and prices following: official exchange-rate adjustments, price reforms, and altered risks of monetary confiscation or currency reforms.

The Foreign Currency Exchange Services industry was aided over the five years to 2018 by continued growth in international trade and travel. Downstream corporate clients rely on industry operators for business-to-business payment services, while downstream individuals generally use credit and debit card processing services and currency exchange offerings. Moreover, technological change, in the form of improved debit card offerings and mobile apps, have made industry services more convenient. Most industry operators are small in size and handle a correspondingly small number of transactions. Annual gross foreign currency exchange transactions exceed $500,000 for a small minority of industry operators. However, there are a few large players that operate in the industry, including Travelex Group, which has locations throughout the United States. Over the five years to 2023, the factors that affect downstream demand levels, including trade and travel, are anticipated to continue improving during the five-year period.

Keywords: Black Markets, Exchange Rate, Hoarding, Overshooting etc.

Proceeding of 2021-ICFBE  The article is recommended by the committee of 2021 International Conference of Finance, Business and Entrepreneurship (2020-ICFBE).