Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework
Summary:
The paper develops and tests a model of a developing economy that incorporates trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Temporary expansionary demand policies are associated with an increase in output and prices, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. The speed of adjustment is inversely related to the degree of rationing in the official foreign currency market. A once-for–all devaluation of the official exchange rate has no long-term effect on the premium.
Series:
Working Paper No. 1990/016
Subject:
Currencies Currency markets Exchange rates Financial markets Foreign assets Foreign exchange Money Multiple currency practices
Notes:
Also published in Staff Papers, Vol. 37, No. 3, September 1990.
English
Publication Date:
March 1, 1990
ISBN/ISSN:
9781451923230/1018-5941
Stock No:
WPIEA0161990
Pages:
44
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