Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries
August 1, 1993
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Summary
It is often argued that the parallel market premium is a useful indicator of real exchange rate misalignment in developing countries. The empirical evidence does not, however, suggest the existence of a robust correlation between these two endogenous variables that is independent of the nature of economic shocks and various structural relationships in the economy. This paper presents an analytical investigation of the reliability of the parallel market premium as an indicator of real exchange rate misalignment in the context of a fully optimizing model of a developing country. The analysis suggests that one should exercise caution in drawing inferences about the sign and magnitude of real exchange rate misalignment from the parallel market premium.
Subject: Consumption, Currency markets, Exchange rates, Real exchange rates, Real interest rates
Keywords: exchange rate, WP
Pages:
26
Volume:
1993
DOI:
Issue:
070
Series:
Working Paper No. 1993/070
Stock No:
WPIEA0701993
ISBN:
9781451960358
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 41, No. 1, March 1994.
