Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries
IMF Working Papers, August 1, 1993
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- Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries
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Bibliographic details
- Authors: Jonathan David Ostry, Peter J Montiel
- Published: August 1, 1993
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451960358.001
Summary
- The paper examines whether the parallel market premium is a useful indicator of real exchange rate misalignment in developing countries.
- It presents an analytical investigation within a fully optimizing model of a developing country.
- Main conclusion: exercise caution in inferring the sign and magnitude of real exchange rate misalignment from the parallel market premium.
Key findings and analysis
- Empirical evidence does not suggest the existence of a robust correlation between the parallel market premium and real exchange rate misalignment that is independent of:
- the nature of economic shocks, and
- various structural relationships in the economy.
- The analytical model shows that the relationship between the parallel market premium and real exchange rate misalignment is endogenous and sensitive to model features and shocks.
- The paper highlights limitations of using the parallel market premium as a standalone indicator for assessing real exchange rate misalignment.
Subject areas and keywords
- Subject: Consumption, Currency markets, Exchange rates, Real exchange rates, Real interest rates
- Keywords: exchange rate, WP