Write a review of the attached piece of literature on the relevant issue "Persistent volatility in the exchange rate market affects price stability and the consistency of business planning in Jamaica"

seeks to improve the flow of information to the market by providing an electronic interface between the Bank of Jamaica and authorized dealers and cambios, The system was aimed at facilitating the reporting of information in real time. It allows traders to track trends in the spot market throughout the day, allowing for more informed decisions on the part of traders, thereby enhancing the efficiency of the spot market. The introduction of E-gate also allowed foreign exchange market transactions conducted through cambios to be used in the calculation of the daily, weighted average exchange rate. later-dealer Market In international markets, the bulk of foreign exchange trading is conducted through the interbank system. The rest is done through brokers or more recently electronic brokering on systems such as Reuters 2000-2, Electronic Brokering Service (EBS) and Minex (Japan). Brokers bring buyers and sellers together for a commission. Approximately 40.0 per cent of total volumes traded on international markets is mediated by brokers, One institutional feature of international foreign exchange market that has been made apparent through empirical work is that on average 80 0 per cent of trading volume is between dealers. In the Jamaican foreign exchange market the local inter-dealer market accounts for approximately 60.0 per cent of foreign exchange market transactions. Though the Jamaican foreign exchange market is somewhat similar to international markets with regard to the volume of inter-dealer trade, the thinness of the market allows for the possibility of collusion among dealers. Additionally, the market is dominated by a few large players who have the ability to affect volumes and generate excessive volatility in the exchange rate. There is also an absence of any brokering in the Jamaican FX market, and most dealers and cambios trade on their own account. The remaining proportion of trading volume is over the counter, where end users directly approach dealers and cambios to conduct their foreign exchange transactions.\fchannel postulates that dealers use prices to control movements in their positions. The latter focuses on the presence of traders with private information and in light of this, dealers, because they are rational, will adjust their beliefs and prices in response to changes in order flow. One implication corning from both views is that trades initiated by buyers will drive prices upwards. Lyons (1993) using intra-daily data found strong evidence in favour of both strands of the microstructure theory. 2.3.2 Bid- ask spreads volatility and Volume The microstructure literature has also found a positive relationship between trading volumes volatility and spreads in foreign exchange market Microstructure theory suggests that inventory cost is one component of the spreads in financial markets. Models that seek to explain inventory costs establish a link between spreads volatility and trading volumes. The cost of maintaining an open position in any currency is one determinant of inventory costs, which is positively related to price risk. According to this view, exchange rate volatility increases price risk and thereby pushes up spreads. Thus spreads widen when exchange rate volatility increases. Melvin and Bolerslev (1994), Beasembinder (1994) found a positive correlation between spreads and expected volatility measured by GARCH forecasts. Trading activity, according to the literature is another determinant of inventory costs, Volumes impact spreads differently depending on whether they are expected or unexpected. Unexpected trading volumes should have a positive impact on spreads given that they should reflect the arrival of news to the market By contrast, expected trading volumes should be negatively correlated with spreads to the extent that they reflect economies of scale associated with higher competition among market makers. 3. The Jamaican Foreign Exchange Market The present exchange rate regime was born out of the need for a more flexible approach to exchange rate determination and was deemed as necessary in light of the deficiencies and inefficiencies that characterised the previous foreign exchange rate mechanisms. It Page 9 of 9