Sources of fluctuations in parallel exchange rates and policy reform in Myanmar

Koji Kubo

No 388, IDE Discussion Papers from Institute of Developing Economies, Japan External Trade Organization(JETRO)

Abstract: Myanmar maintained a multiple exchange rate system, and the parallel market exchange rate was left untamed. In the last two decades, the Myanmar kyat exchange rate of the parallel market has exhibited the sharpest fluctuations among Southeast Asian currencies in real terms. Since the move to a managed float regime in April 2012, the question arises of whether exchange rate policies will be effective in stabilizing the real exchange rate. This paper investigates the sources of fluctuations in the real effective exchange rate using Blanchard and Quah’s (1989) structural vector autoregression model. As nominal shocks can be created by exchange rate policies, a persistent impact of a nominal shock implies more room for exchange rate policies. Decomposition of the fluctuations into nominal and real shocks indicates that the impact of nominal shocks is small and quickly diminishes, implying that complementary sterilization is necessary for effective foreign exchange market interventions.

Keywords: Myanmar; Foreign exchange; Real and nominal effective exchange rates; Structural VAR (search for similar items in EconPapers)
JEL-codes: F31 F41 O53 (search for similar items in EconPapers)
Date: 2013-02-01
New Economics Papers: this item is included in nep-cwa, nep-mon and nep-sea
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Published in IDE Discussion Paper = IDE Discussion Paper, No. 388. 2013-02-01

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