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International Monetary Fund. Western Hemisphere Dept.

rate regime is crawling peg to the U.S. dollar. Within the scope of the official crawling peg exchange rate regime, in an external environment characterized by market exchange rate volatility and decreasing external inflation, the sliding rate was set to zero to anchor the public’s expectations. Consequently, the boliviano stabilized against the U.S. dollar since November 2011. Accordingly, the de facto exchange rate arrangement has been retroactively reclassified to a stabilized arrangement from a crawling peg, effective November 2, 2011. The exchange regime is free

International Monetary Fund. Western Hemisphere Dept.

peg to the U.S. dollar. Within the scope of the official crawling peg exchange rate regime, in an external environment characterized by market exchange rate volatility and decreasing external inflation, the sliding rate was set to zero in 2011 to anchor the public’s expectations. Consequently, the boliviano has stabilized against the U.S. dollar since November 2011. Accordingly, the de facto exchange rate arrangement has been retroactively reclassified to a ‘stabilized arrangement’ from a crawling peg, effective November 2, 2011. The exchange regime is free of

Michael Nowak

prevailing demand for foreign exchange, the black market will tend to be thin and the black market exchange rate volatile. Conversely, in those countries which face chronic balance of payments pressures and have insufficient reserves or borrowing capacity to defend the official rate, black market activities are typically well developed and organized, with the price of foreign exchange as much as ten times higher than the official rate. In a number of countries, black market transactions are officially tolerated, though strictly speaking illegal; under such conditions, the

International Monetary Fund. Western Hemisphere Dept.

peg to the U.S. dollar. Within the scope of the official crawling peg exchange rate regime, in an external environment characterized by market exchange rate volatility and decreasing external inflation, the sliding rate was set to zero in 2011 to anchor the public’s expectations. Consequently, the boliviano has stabilized against the U.S. dollar since November 2011. Accordingly, the de facto exchange rate arrangement has been retroactively reclassified to a ‘stabilized arrangement’ from a crawling peg, effective November 2, 2011. The exchange regime is free of

International Monetary Fund. Western Hemisphere Dept.

identified vulnerabilities, except for those requiring a change in the central bank law. Currently, CBB is not subject to the policy. Exchange Arrangement : The Bolivian currency is the Boliviano and the de jure exchange rate regime is crawling peg to the U.S. dollar. Within the scope of the official crawling peg exchange rate regime, in an external environment characterized by market exchange rate volatility and decreasing external inflation, the sliding rate was set to zero to anchor the public expectations. Consequently, the boliviano stabilized against the U

International Monetary Fund

cyclical differences have kept the dollar strong in effective terms in the last couple of years, current account imbalances suggest a weaker dollar over the medium term. If this tension is reconciled abruptly—or if the realignment is amplified by leverage or other technical features of foreign exchange markets—exchange rate volatility could result, with an associated risk of spillovers into other markets. The international financial system also faces risks from the Y2K problem. Owing to strong and early efforts by many national authorities, most financial institutions

International Monetary Fund

Rate Volatility 2/ Long-Run Real Parallel Market Exchange Rate Volatility 2/ Short-Run Real Parallel Market Exchange Rate Volatility 2/ (1) (2) (3) (4) With Country and Time Fixed Effects -3.92* -2.72* -1.20* -0.55 (1.3) (1.04) (0.63) (0.73) Implied Pecentage Change in Trade by One Standard Deviation Increase in Volatility -10.98% -6.80% -6.48% -2.15% With Country Pair and Time Fixed Effects -4.72* -4.15* -0.42 -1.14* (0.76) (0.55) (0.34) (0.41) Implied Pecentage Change

Mr. Jorge I Canales Kriljenko, Mr. Cem Karacadag, Roberto Pereira Guimarães, and Mr. Shogo Ishii

exchange rate risk associated with a previous trade, with few or no participants willing to remain exposed. 16 Trading may once again collapse if orders become entirely one-sided. In this case, central banks should intervene to prevent a collapse of liquidity in the foreign exchange market. Exchange rate volatility is another vital indicator of market conditions. 17 However, it is not necessarily a source of concern unless other indicators such as widening bid-offer spreads suggest disorderly market conditions. Volatility often reflects, among other things

Jorge Iván Canales-Kriljenko, Roberto Pereira Guimarães, and Cem Karacadağ

This may also be symptomatic of “hot potato” trading, where interbank activity rises as dealers try to pass on or hedge the exchange rate risk associated with a previous trade, with few or no participants willing to remain exposed. 26 Trading may once again collapse altogether if orders become entirely one-sided. In this case, central banks should intervene to prevent a collapse of liquidity in the foreign exchange market. Exchange rate volatility is another vital indicator of market conditions. 27 However, it is not necessarily a source of concern per se unless