EC The Evolution Of Exchange Rate Markets

Back in 1848, John Stuart Mill made a classic argument that money was insignificant to the essential nature of an economy, because it was only a facilitator for what really matters--the actual transactions. Mill wrote (Principles of Political Economy, Book III, Ch. VII):

There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labour. It is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order.

In a globalized economy, one might similarly argue that the exchange rate market is an insignificant thing. What really matters, one might claim, is the real flows of imports and exports, or the patterns of international financial investments. However, the exchange rate market involves trades totaling  $6.6 trillion per dayThis is vastly more than needed to finance exports and imports or to finance foreign direct investment and portfolio investment. Instead, the foreign exchange market is clearly being driven by financial transactions: specifically, those who are hedging against shifts in exchange rates, those who are trying to make a profit by trading in exchange rate markets, or both. It cannot be viewed as, in Mill's language, an intrinsically insignificant thing.

The go-to source for information about exchange rate markets is the Triennial Survey conducted by the Bank for International Settlements (an international organization run by the central banks and monetary authorities of 60 different countries). The BIS Quarterly Review for December 2019 offers a five-paper symposium with details on the size and operation of exchange rate markets. Here, I'll mention some of the highlights from the overview paper by  Philip Wooldridge, "FX and OTC derivatives markets through the lens of the Triennial Survey."  The five papers that follow in the issue are:

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Sherief Cassis 5 days ago Contributor's comment

Fascinating