“Nominal Exchange Rate Flexibility and Real Exchange Rate Adjustment:Evidence from Dual Exchange Rates in Developing Countries” by Yin-Wong CHEUNG
University of California, Santa Cruz
Kon S. LAI
California State University, Los Angeles
This study investigates whether exchange rate flexibility aids real exchange rate adjustment. Instead of relying on inter-period comparisons of exchange rate regimes, as previous studies of industrial countries have done, this study examines intra-period data on dual exchange rates from developing countries. Specifically, it analyzes whether the flexible parallel market rate implies a faster speed of real exchange rate adjustment than the much less flexible official rate does. We find that greater nominal exchange rate flexibility does not tend to produce faster real exchange rate adjustment. The study also uncovers substantial variation in adjustment speeds across developing countries. We further examine whether the observed cross-country variation in adjustment speeds can be linked to inter-country differences in structural economic characteristics, including trade openness, productivity growth, government spending, and money growth.