Exchange Rate Determination in Developing Economies: Recent Developments

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.