Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework
March 1, 1990
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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.
Subject: Currencies, Currency markets, Exchange rates, Financial markets, Foreign assets, Foreign exchange, Money, Multiple currency practices
Keywords: Currencies, Currency markets, exchange rate, exchange rate differential, Exchange rates, market rate, money stock, Multiple currency practices, price level, rate of change, rate of inflation, rate of return, WP
Pages:
44
Volume:
1990
DOI:
Issue:
016
Series:
Working Paper No. 1990/016
Stock No:
WPIEA0161990
ISBN:
9781451923230
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 37, No. 3, September 1990.
