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

Yin-Wong Cheung and Kon S. Lai

No 1512, CESifo Working Paper Series from CESifo Group Munich

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.

Keywords: real exchange rate; fractional time series; half life (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-mon
Date: 2005
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