Nominal Exchange Rate Flexibility and Real Exchange Rate Adjustment: New Evidence from Dual Exchange Rates in Developing Countries

Yin-Wong Cheung and Kon S. Lai
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Kon S. Lai: California State University, Los Angeles

No 92007, Working Papers from Hong Kong Institute for Monetary Research

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.

Keywords: Real exchange rate; Fractional time series; Half life; Adjustment speed (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2007-05
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Nominal exchange rate flexibility and real exchange rate adjustment: New evidence from dual exchange rates in developing countries (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:hkm:wpaper:092007

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