Abstract
This study has provided an alternative way other than the orthodox ways in which most developing countries (LDCs) have dealt with the question of overvaluation of their domestic currencies. This study rejects devaluation and/or foreign exchange controls as appropriate instruments to combat the type of overvaluation confronting the LDCs. A dynamic model for adjusting the exchange rate has been constructed. The ‘fundamental’ determinants - the money stock, the government financial policies, incomes policy and shifts in the terms-of-trade-have been recognized; but the model has been based mostly on their transmission effects. The managed fluctuations of the exchange rate resulting from the application of the model will eliminate excess demand for and needless accumulation of foreign exchange earnings, they will thereby forestall or appropriately respond to the disequilibrium system that often impinges on the LDC's economic development process.
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