| 20 January, Thursday (3:00pm-4:30pm) Session 3A: Macro and Monetary Economics |
A Foreign Exchange Market Model with a Backlog of Unmet Orders
Author/s: Martin Davies, Marcel Schroder
We build a foreign exchange market (forex) model featuring stock imbalances of domestic and foreign currency that arise in economies subject to prolonged forex rationing in the absence of a sizable black market. Whether domestic currency-holders enter the market depends on how the shoe-leather costs associated with the conversion compare with their expected exchange rate depreciation. Forex holders consider the asset return differential and their expectations of exchange rate depreciation and shoe-leather costs. In this environment, restoring forex market equilibrium requires resolving the stock imbalances through a frontloaded depreciation instead of an often-favored gradual approach.
JEL codes: F31, O11