Nominal Exchange Rates Adjustment and Long-Run Competitiveness in Less Developed Countries
22 Pages Posted: 19 Aug 2008
Date Written: August 17, 2008
This empirical paper explores the important policy issue of whether or not LDCs can achieve a long-run real exchange rate devaluation through a nominal devaluation. For this purpose, tests for cointegration and the estimation of the long-run relationship between the real and nominal exchange rate is by a range of recently developed panel data techniques advocated by Pedroni. Using a panel of nineteen LDCs over the period 1973-2001, this study employs fully modified OLS and dynamic OLS to estimate a group-mean long-run elasticity between the nominal and real US dollar exchange rate of about one quarter. However, there is considerable variation across the sample of LDCs where the evidence indicates that the effectiveness of a nominal devaluation is inversely related to the domestic inflation rate.
Keywords: Exchange Rate, Less Developed Countries, Panel Data
JEL Classification: E0, F4, O5
Suggested Citation: Suggested Citation