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About the article
Published Online: 2014-02-21
This is distinct from shorting a currency, where one takes up a position in anticipation of a price change that is exogenous to oneself, and on which much has been written.
The modeling of markets where there are oligopolistic (and oligopsonistic) players on the two sides of the market, some buying dollars because they can put them to high-valued use and some selling dollars because they have access to cheap dollars, requires an adaptation of the standard model of either oligopoly or oligopsony. Adapting some pre-existing work of a very different nature (e.g., Armstrong 2006), this is not hard to do. But in this paper I shall confine our attention to a case where all big players happen to be on the same side of the market.
I am also ruling out here the presence of foreign exchange hedging. In reality, when there is expectation of some fluctuation in the exchange rate market, many players do go in for complex hedging strategies (see, e.g., Ware and Winter 1988; Brown 2001). But for reasons of simplicity, this is ruled out in the present model.
It is being assumed the currency manipulator is a new agent that comes into the foreign exchange market. It is entirely possible to think, instead, in terms of one of the dealers turning manipulator. This simply entails changing n to (n–1) in equation (6) and also in (7).
In this sense the manipulator is like a Stackelberg leader (as in, for instance, Basu and Singh 1990). However, in this paper we do not work out the sub-game perfect equilibrium but simply show how the manipulator or the Stackelberg leader can make a profit.