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

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.