Exchange Restrictions and Devaluation Crises

Author/Editor:

Pierre-Richard Agénor

Publication Date:

September 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:

This paper develops a model of devaluation crises for an economy where foreign exchange restrictions lead to the emergence of a parallel market. The devaluation rule relates the size of the parity change to the spread between the official and parallel exchange rates. The mechanism that triggers the devaluation relates credit policy and the inflation tax. A credit expansion leads to an increase in the spread and possibly to a fall in inflation tax revenue, as agents switch away from domestic currency holdings. A devaluation reverses temporarily the process of erosion of the tax base if the associated fall in the premium raises the credibility of the new parity.

Series:

Working Paper No. 1990/084

Subject:

English

Publication Date:

September 1, 1990

ISBN/ISSN:

9781451954340/1018-5941

Stock No:

WPIEA0841990

Pages:

40

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