Exchange Rate Determination in Developing Economies
- 1 Department of Economics, University of Ibadan, Ibadan, Nigeria
Abstract
This paper identifies the determinants of nominal exchange rate movements in less developed countries operating the flexible exchange rate system. Factors peculiar to such countries which are believed to potently drive their nominal ex-change rates are incorporated into the resulting model. In particular, the weather, parallel market exchange rate and its associated premium as well as corrupt practices enter the model. While all four factors should play crucial roles in ex-plaining short-run variations in the exchange rate, corrupt practices may still be at work in the long-run. However, those more advanced developing countries that have succeeded in instituting a relatively more effective legal system stem-ming the tide of corruption, and, also characterized by a near absence of parallel exchange rate market, may follow the standard model of exchange rate in the literature.
- P. Isard, “Exchange Rate Economics: Survey of Econo- mic Literature,” Cambridge: Cambridge University Press, 1995.
- R. MacDonald and M. P. Taylor, “The Monetary Model of the Exchange Rate: Long-Run Relationships, Short- Run Dynamics and How to Beat a Random Walk,” Jour- nal of International Money and Finance, Vol. 13, No. 3, 1994, pp. 276-290. doi:10.1016/0261-5606(94)90029-9
- M. P. Tay-lor, “The Economics of Exchange Rates,” Jour- nal of Economic Literature, Vol. 33, No. 1, 1995, pp. 13- 47.
- J. A. Frenkel, “A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence,” Scandinavian Journal of Economics, Vol. 78, No. 2, 1976, pp. 200-224.
- J. A. Frenkel and M. L. Mussa, “Assets Markets, Exchange Rates and the Balance of Payments,” In: R. W. Jones and P. B. Kenen, Eds., Handbook of International Economics, Vol. II, 1985, pp. 679-747. doi:10.1016/S1573-4404(85)02005-6
- F. Machlup, “The Theory of Foreign Exchanges,” Eco- nomica, Vol. 6, No. 24, pp. 375-397. doi:10.2307/2548881
- D. R. Appleyard, A. J. Field Jr. and S. L. Cobb, “International Economics,” 5th Edition, McGraw-Hill/Irwin Co., Boston, Chaps 20, 22.
- M. O. Ojo, “Principles and Practice of Monetary Manage- ment in Nigeria,” Central Bank of Nigeria, Abuja, 2001, p. 152.
- K. Rogoff, “The Purchasing Power Parity Puzzle,” Jour- nal of Economic Literature, Vol. 34, No. 2, 1996, pp. 647-668.
- R. Dornbusch, D. V. Dantas, C. Pechman, R. R. Rocha and S. Simoes, “The Black Market for Dollars in Brazil,” Quarterly Journal of Economics, Vol. 98, No. 1, 1983, pp. 25-40. doi:10.2307/1885565
- E. Asiedu and J. Freeman, “The Effect of Corruption on Investment and Growth: Evidence from Firms in Latin America, Sub-Saharan Africa, and Transition Countries,” Review of Development Economics, Vol. 13, No. 2, 2009, pp. 200-214. doi:10.1111/j.1467-9361.2009.00507.x
- E. Anorou and H. Braha, “Corruption and Economic Growth: The African Ex-perience,” 2005. http://www.jsdafrica.com/Jsda/Spring2005/ArticlePDF/Arc_Corruption%20and%20Economic% 20Growth.pdf
- Y. Dis-sou and T. Yakaustava, “Corruption, Growth and Taxation,” Theoretical Economics Letters, Vol. 2, No. 1, 2012, pp. 62-66. doi:10.4236/tel.2012.21011
- O. D. Ogun, “Corruption and Long-Run Growth: A Frame- work, ” Unpublished.