Testing the Efficiency of the Foreign Exchange Market When the Base Currency is Pegged to a Basket

Within-market and cross-sectional efficiency are tested using the exchange rates of the Kuwaiti dinar (KD) against the four major currencies which are believed to be the components of the basket to which this currency is pegged. The empirical results, which support both kinds of efficiency, are examined in the light of the exchange rate arrangement adopted by the Central Bank of Kuwait (CBK). It is also concluded that while the CBK has not adhered strictly to the basket to which the KD is pegged, it has endeavoured to maintain credibility with respect to its objective of exchange rate stability