Dollarization hysteresis and network externalities: theory and evidence from an informal Bolivian credit market

This paper considers network externalities from currency acceptability as a determinant of observed persistence of dollarization in Latin American countries. A model with efficiencies from establishing a network of currency users is constructed. Model implications are then tested using a unique data set of daily loan records from an informal Bolivian credit market. Empirical results are consistent with dollarization hysteresis being driven by network externalities from currency adoption. The results also imply that credible exchange rate stabilization policy alone is not sufficient to achieve dollarization reversal.Bolivia ; Latin America ; Dollar, American

Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market.

This article identifies price leadership patterns in foreign exchange trading, with a focus on central bank intervention as an informational trigger for leadership positioning. Granger causality tests applied to DM/US$ spot rate quotes reveal Deutsche Bank as a price leader up to sixty minutes prior to Bundesbank interventionary reports. By the minus twenty-five-minute mark, interbank quote adjustments become two-way Granger-causal. These results suggest that central bank activity is revealed in stages: first to the price leader, then to competitors, and lastly to the general public. Copyright 1997 by American Finance Association.

The Global Transmission of Volatility in the Foreign Exchange Market

Volatility spillovers of the DM/$and �/$ exchange rate across regional markets are examined using the integrated volatility of high-frequency data. An analysis of quoting patterns reveals five distinct regions: Asia, Asia-Europe overlap, Europe, Europe-America overlap, and America. After reviewing theoretical foundations for persistence of volatility in dealership markets, regional volatility models are constructed where volatility in one region is a function of yesterday's volatility in that region ("heat-wave effect") and volatility in other regions ("meteor-shower effect"). Evidence of statistically significant effects is found for both own-region and interregional spillovers, but the economic significance of own-region spillovers indicates that heat waves are more important than meteor showers. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.