Efficiency testing revisited: a foreign exchange market with Bayesian learning

Article Abstract:

The existence of extraneous depreciation expectations and lack of understanding about monetary policy have rendered the traditional efficiency hypothesis ineffective in determining inefficiencies of financial markets. In an attempt to address the problem, the efficiency hypothesis was modified to integrate the concept of Bayesian learning. Through the use of the proposed model, accurate specifications were obtained by evaluating the efficiency equations of various depreciation lags and forward discount rates. The efficiency of the model was further evaluated by actual application in Greek foreign exchange market.

Exchange Rates, Domestic Financial Transactions, Analysis, Usage, Bayesian statistical decision theory, Bayesian analysis, Financial markets

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An arbitrage free trilateral target zone model

Article Abstract:

An arbitrage free trilateral model of a credible target zone regime with bands on each bilateral exchange rate is suggested. Without arbitrage, there are only two dimensions. Any two rates must be within their boundaries. However, movement is also limited by the band of the redundant rate. Hence, target zone models formulated for bilateral situations are not applicable for general systems with a cobweb of bilateral bands, such as the European Monetary System. The model is estimated using simulated moments because the model has no known analytical solution.

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Dollarization and inflation in a two-country optimization model

Article Abstract:

A model is presented to analyze dollarization in the case country of LA (Latin America), with a two-country (LA and USA), two currency (peso and dollar) system. A general equilibrium model finds that a strategic interdependence between dollar and peso inflation rates. Results indicate some circumstances in which further dollarization and more seigniorage income can be coincident. Dollarization will take place on the wrong side of the Laffer curve if the LA government chooses an inflation tax to finance its spending.

Inflation (Finance), Inflation (Economics), Convertible money

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