Dual and multiple exchange rate systems in developing countries: some empirical evidence

Nita Ghei and Miguel A. Kiguel

No 881, Policy Research Working Paper Series from The World Bank

Abstract: The authors examine the determinants of the parallel exchange rate for a cross-country sample of developing countries. The sample includes countries in which the parallel exchange rate is official (dual exchange rate systems) as well as those in which it is unofficial (black market). They base their empirical analysis on a portfolio macroeconomic model in which the parallel exchange rate is determined by expectations and equilibrium asset considerations in the short run, but depends on the evolution of key policy variables (such as stock of money, budget deficits, and trade policy) in the long run. The results indicate that macroeconomic variables explain more than 70 percent of the variation in the spread between the official and parallel exchange rates. The authors cannot reject the hypothesis that there are no differences in the determinants of the spread when the parallel rate is official and unofficial. Also, they cannot reject the hypothesis that restrictions on the capital account affect the spread. These results are consistent with prior findings that portfolio considerations dominate the determination of the parallel rate in the short run. There is evidence that the adoption of dual exchange rate systems only partly insulates domestic prices. This insulation may be limited by : 1) a leakage of transactions from the official to the parallel market; and 2) depreciation of the parallel exchange rate.

Keywords: Fiscal&Monetary Policy; Financial Economics; Economic Stabilization; Economic Theory&Research; Macroeconomic Management (search for similar items in EconPapers)
Date: 1992-04-30
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi0page.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:881

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi (ryazigi@worldbank.org).