INTRODUCTION
The extent of financial integration in the modern world, reflected in the magnitude and pervasiveness of financial flows, has served to intensify research on the economic functioning of foreign exchange markets. In the open economy, international financial flows will ensure that interest rate parity is maintained for assets of similar maturities, or that the interest differentials exactly reflect expectations about exchange rate changes, provided there are no frictions and externalities. The overwhelming majority of studies of the foreign exchange markets have explored whether exchange markets do function in this manner and, when they do not, what seems to account for the observed excess returns to foreign exchange speculation. A variety of hypotheses have been tested to explain why interest premia are typically higher than may be anticipated on the basis of expectations of exchange rate changes.This literature has almost never focused exclusively on the behavior of the foreign exchange market in regimes where the exchange rate is pegged, although some studies (for example Flood and Rose, 2001) do include pegged exchange rate markets in their sample. That may be because comparatively few countries have maintained a pegged exchange rate for such a long period, and through such vicissitudes of economic circumstance, that market expectations of exchange rate changes are virtually zero. This is a distinguishing characteristic of some currencies of smaller Caribbean countries, including the Barbadian dollar, the exchange market for which is the subject of the present study. In the absence of exchange rate uncertainty, inflows and outflows of foreign exchange should respond to interest differentials, in a way that maintains uncovered interest parity (UIP). We test whether the flow of foreign currency transactions in Barbados is motivated by UIP between Barbadian dollar assets and equivalent assets denominated in U.S. dollars, the currency to which the Barbadian dollar has been pegged at an unchanged value since July 1975. Our working hypothesis is that international financial flows, reflected in daily transactions in the foreign exchange market, serve to equilibrate the Barbadian interest rate to the U.S. equivalent, apart from structural features, market frictions, and imperfections, all of which can be accounted for in the estimation.
Terms of Use: This is an academic paper. Students should NOT copy our materials word to word, as we DO NOT encourage Plagiarism. Only use as a guide in developing your original research work. Thanks.
Disclaimer: All undertaking works, records, and reports posted on this website, eprojectguide.com are the property/copyright of their individual proprietors. They are for research reference/direction purposes and the works are publicly supported. Do not present another person’s work as your own to maintain a strategic distance from counterfeiting its results. Use it as a guide and not duplicate the work in exactly the same words (verbatim). eprojectguide.com is a vault of exploration works simply like academia.edu, researchgate.net, scribd.com, docsity.com, course hero, and numerous different stages where clients transfer works. The paid membership on eprojectguide.com is a method by which the site is kept up to help Open Education. In the event that you see your work posted here, and you need it to be eliminated/credited, it would be ideal if you call us on +2348064699975 or send us a mail along with the web address linked to the work, to eprojectguide@gmail.com. We will answer to and honor each solicitation. Kindly note notification it might take up to 24 – 48 hours to handle your solicitation.