Nominal exchange rate flexibility and real exchange rate adjustment : New evidence from dual exchange rates in developing countries

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)415-434
Journal / PublicationJapan and the World Economy
Volume20
Issue number3
StatePublished - Aug 2008
Externally publishedYes

Abstract

This study investigates whether greater nominal exchange rate flexibility aids real exchange rate adjustment based on data from dual exchange rates in developing countries. Specifically, we analyze whether the more flexible parallel market rate produces faster real exchange rate adjustment than the less flexible official rate does. Half-life estimates of adjustment speeds are obtained from fractional time series analysis. We find no systematic evidence that greater exchange rate flexibility tends to produce either faster or slower real exchange rate adjustment, albeit there is substantial cross-country heterogeneity in speed estimates. With official rates pegged to the dollar, many developing countries use parallel exchange markets as a back-door channel to facilitate real exchange rate adjustment. The evidence suggests, however, that these parallel markets often fail to speed up real rate adjustment. © 2007 Elsevier B.V. All rights reserved.

Research Area(s)

  • Adjustment speed, Fractional time series, Half life, Real exchange rate