Exchange Rate Determination in Developing Economies: Recent Developments

Abstract

This paper identified the determinants of nominal exchange rate movements in less developed countries operating the flexible exchange rate system. Factors peculiar to such countries which were believed to potently drive their nominal exchange rates were incorporated into the resulting model. In particular, the weather, parallel market exchange premium and corrupt practices entered the model. While all three factors should play crucial roles in explaining short run variations in the exchange rate, corrupt practices might still be at work in the long-run. However, those more advanced developing countries that had succeeded in instituting a relatively more effective legal system stemming the tide of corruption, and, also characterized by a near absence of parallel exchange rate market, might follow the standard model of exchange rate in the literature.