Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework

Author/Editor:

Pierre-Richard Agénor

Publication Date:

March 1, 1990

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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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