How does flexibility reforms reshape market behaviour? A comparative study from the MENA region
Keywords:exchange rate, forex market, flexibility, volatility
This study investigates the impact of flexibility reforms on the foreign exchange market in various countries with intermediary regimes. Using the case of three MENA countries with different flexibilization processes, we conducted a comparative study using GARCH and FIGARCH models to exhibit various market behaviour changes. Our main results are that flexibilization reforms increase market volatility and sensitivity to endogenous shocks, especially in countries with challenging economic context during the transition. On the other hand, the flexibility reforms contribute to market development, allowing it to have more leeway in adjusting prices accordingly with the offer and demand. Finally, we presented the policy implications of this study and some propositions for future research. This study’s conclusions will help monetary authorities and market participants prepare a detailed road map to efficiently conduct the flexibilization process and avoid various risks linked to this type of transition.
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