What about Frankel?
Let’s combine both of them, shall we?
Two countries, Russia and Angola are petro-dependent. While Russia has flexible exchange rates, Angola had a fixed (but adjustable) peg, until December 2017.
That meant that as Russian ruble was depreciating almost pairwise with oil, Angolan kwanza was slow to adjust to its “equilibrium value”.
Well, since the semi-administered floating starting in 2018, it lost more than 20% against the US Dollar, being now in counter cycle with oil prices, as can be seen below comparing the total variation against the US dollar since January 2014, of the Ruble, the Kwanza and Brent.
So, imagine that Angola had Pegged to its Export Price, like Frankel said, its official exchange rate would be close to equilibrium (as it would move with oil prices).
But, as the gap between the official and the equilibrium rate started to widen, bigger desiquilibriums appeared, which would widen still further the equilibrium exchange rate gap. Just like a Wicksellian process when the market rate is set above equilibrium rate.
How can we know that? Well, the black market rate is still enormous (the informal rate stands today at USDAOA 415, when the official is USDAOA 213) which means we are still a long way from equilibrium.
But is that equilibrium about?
That’s the topic for the next two posts..