Institutional Division of the Central Bank and Dual Exchange Rates in Yemen (2015–2025): Evidence from VECM and GARCH Models an Empirical Analytical Study (2015–2025)

Abstract

The research investigates the impact of the institutional split-up at the Central Bank of Yemen (CBY) and the dualism of the exchange rate on monetary stability between 2015 and 2025. Using Johansen cointegration tests, the Vector Error Correction Model (VECM), and volatility functions based on GARCH models, it provides empirical insights into the behavior of official and parallel exchange rates. Findings reveal that the official rate remained relatively stable, fluctuating between 215 YER/USD and 240 YER/USD, while the parallel rate experienced dramatic depreciation, reaching levels six to eight times higher than the official rate at various points. VECM error correction coefficients for parallel and official rates were 0.0379 and 0.0029 respectively, indicating faster adjustment for the parallel rate. A stable unit-root cointegrated matrix with beta near –0.8942 suggests significant interaction between the two rates despite institutional fragmentation. Volatility analysis confirms strong clustering properties for the parallel rate, consistent with the GARCH (1,1) model, implying persistent uncertainty from exchange rate shocks. The widening gap between official and parallel rates—sometimes exceeding 500%—is linked to accelerated monetary growth and lack of coordination between rival authorities. This study addresses a critical gap in literature by introducing a comprehensive analytical framework to assess Yemen’s dual monetary structure within a fragmented institutional environment.