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Title:Nominal exchange rate flexibility and real exchange rate adjustment : evidence from dual exchange rates in developing countries PDF Logo
Authors:Cheung, Yin-Wong
Lai, Kon-Sun
Issue Date:2005
Series/Report no.:CESifo working papers 1512
Abstract:This study investigates whether exchange rate flexibility aids real exchange rate adjustment based on intra-period data on dual exchange rates from developing countries. Specifically, it analyzes whether the flexible parallel market rate produces faster or slower real exchange rate adjustment than the much less flexible official rate does. Half-life estimates of adjustment speeds are obtained using fractional time series analysis. We find no systematic evidence that greater exchange rate flexibility tends to produce faster or slower real exchange rate adjustment, albeit there is substantial heterogeneity in speed estimates across countries. With officially pegged exchange rates, developing countries often use parallel exchange markets as a back-door channel to facilitate real exchange rate adjustment, but the empirical evidence suggests that these parallel markets in most cases fail to help promote real rate adjustment.
Subjects:real exchange rate
fractional time series
half life
JEL:C22
F31
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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