Abstract

Liquidity dynamics in the foreign exchange market have huge implications for financial asset values, financial returns, external competitiveness and financial stability in the Caribbean but there is a paucity of research on the liquidity dynamics of these markets in the region. This study seeks to close this gap by investigating in a multivariate GARCH framework the links between foreign exchange trading volume, direct intervention, interest rate policy and exchange rates in Jamaica and Trinidad and Tobago. This approach allows us to look at the links between liquidity and policy variables, both at levels and variance, in a joint framework. This is appropriate when there are multiple links and feedback loops between policy measures and market dynamics and policy makers are very interested in controlling the volatility of the market.

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