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Financial Premium and Real Exchange Rate Misalignment

Author

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  • Fuhmei Wang

    (Department of Economics, National Cheng Kung University, Tainan, Taiwan 701, R.O.C. (e-mail: fmwang@mail.ncku.edu.tw))

Abstract

The literature overwhelmingly believes that the size of a financial premium could be an indicator of the extent of the real exchange rate misalignment under dual exchange rates. We wish to oppose this view. The strategy in this paper is to investigate the effects that monetary and real shocks from domestic or foreign origin have on these variables. We also extend the analysis of the theoretical model by discussing numerical simulations. Both theoretical and numerical examinations together show that such a relationship does not exist. Moreover, we find that the more volatile the financial premium, the more stable the real exchange rate.

Suggested Citation

  • Fuhmei Wang, 2003. "Financial Premium and Real Exchange Rate Misalignment," Journal of Economics, Springer, vol. 78(2), pages 139-161, February.
    • Handle: RePEc:kap:jeczfn:v:78:y:2003:i:2:d:10.1007_s00712-002-0559-4
    DOI: 10.1007/s00712-002-0559-4
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