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Modelling Official And Parallel Exchange Rates In Colombia Under Alternative Regimes: A Non-Linear Approach

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  • Jesús Otero

    (University del Rosario, Bogota)

  • Costas Milas

Abstract

In this paper we look at the long-run relationship between the parallel and the official exchange rate in Colombia over two regimes; a crawling peg period and a more flexible crawling band one. The existence of cointegration between the parallel and official exchange rates in Colombia is consistent with previous findings for other developing economies, and offers support for the view that the parallel market for foreign exchange is not informationally efficient, because past values of the two rates (and of the disequilibrium error) could be used for forecasting the parallel exchange rate. The fact that the parallel rate cointegrates with the official one also implies that the latter has a role to play in the evolution of the former. This should be kept in mind when the monetary authorities affect with their decisions the behaviour of the official exchange rate. Further, we look at the short-run adjustment process of the parallel rate both in a linear and a non-linear context. According to the empirical results, there is strong evidence in favour of non-linear adjustment over the crawling peg but not over the crawling band period. This should not come as a surprise. The first period has witnessed the operation of strict foreign controls that have caused distortions in the transition back to equilibrium, once disequilibrium has occurred. The non-linear adjustment reported in the paper, provides an empirical evidence of the complicated structure under which the exchange rate market operated. With the abolition of exchange rate controls and the introduction of more flexibility in the exchange rate market over the second period, these distortions have gradually been eliminated. As a result, the transition back to equilibrium does not longer seem to exhibit any complicated non-linear structure. Thus, the modelling exercise has showed that the change from the crawling peg exchange rate regime to a crawling band one did not affect the long-run equilibrium relationship between the official and parallel exchange rates in Colombia, but changed radically the short-run dynamics.

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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Workshop Papers, January 2001 with number PO2.

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Date of creation: 04 Jan 2001
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Handle: RePEc:ams:cdws01:po2

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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Keywords: Parallel market; cointegration; non-linear error correction models; Colombia;

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References

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  1. Jesus Otero, 1999. "The real exchange rate in Colombia: an analysis using multivariate cointegration," Applied Economics, Taylor & Francis Journals, vol. 31(5), pages 661-671.
  2. Siklos, P.L. & Granger, C.W.J., 1997. "Regime Sensitive Cointegration with an Application to Interest rate Parity," Working Papers 97-5, Wilfrid Laurier University, Department of Economics.
  3. Michael Moore & Kate Phylaktis, 2000. "Black and official exchange rates in the Pacific Basin: some tests of dynamic behaviour," Applied Financial Economics, Taylor & Francis Journals, vol. 10(4), pages 361-369.
  4. Lee, Tae-Hwy & Tse, Yiuman, 1996. "Cointegration tests with conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 73(2), pages 401-410, August.
  5. Sebastian Edwards, 1986. "Commodity Export Prices and the Real Exchange Rate in Developing Countries: Coffee in Colombia," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 233-266 National Bureau of Economic Research, Inc.
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  7. George Kouretas & Leonidas Zarangas, . "A Cointegration Analysis Of The Official And Parallel Foreign Exchange Markets For Dollars In Greece," Working Papers 9512, University of Crete, Department of Economics.
  8. Baghestani, Hamid & Noer, John, 1993. "Cointegration analysis of the black market and official exchange rates in India," Journal of Macroeconomics, Elsevier, vol. 15(4), pages 709-721.
  9. Dornbusch, Rudiger, et al, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 25-40, February.
  10. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
  11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  12. John Williamson, 1996. "Crawling Band as an Exchange Rate Regime: Lessons from Chile, Colombia and Israel, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 14.
  13. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  14. Ashworth, John & Evans, Lynne & Teriba, Ayo, 1999. "Structural breaks in parallel markets?: the case of Nigeria, 1980-1993," Journal of Development Economics, Elsevier, vol. 58(1), pages 255-264, February.
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Cited by:
  1. Sushanta Mallick & Ricardo Sousa, 2013. "Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies," Open Economies Review, Springer, vol. 24(4), pages 677-694, September.

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