## Recognizing Reality—Unification of Official and Parallel Market Exchange Rates

_IMF Working Papers, February 5, 2021_

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**Canonical URL:** [Recognizing Reality—Unification of Official and Parallel Market Exchange Rates](https://www.imf.org/en/publications/wp/issues/2021/02/06/recognizing-reality-unification-of-official-and-parallel-market-exchange-rates-50047)

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## Bibliographic details
- Authors: Simon T Gray
- Published: February 5, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513568638.001

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### Summary
- Some central banks have maintained overvalued official exchange rates, while unable to ensure that supply of foreign exchange meets legitimate demand for current account transactions at that price.
- A parallel exchange rate market develops in such circumstances; and when the spread between the official and parallel rates is both substantial and sustained, price levels in the economy typically reflect the parallel market exchange rate.
- “Recognizing reality” by allowing economic agents to use a market clearing rate benefits economic activity without necessarily leading to more inflation.
- A unified, market-clearing exchange rate will not stabilize without a supportive fiscal and monetary context.
- A number of country case studies are included; data for the country case studies and the production of the charts were assembled by Jie Ren.

### Key findings and analysis
- Overvalued official exchange rates combined with insufficient foreign exchange supply for current account transactions lead to the emergence of parallel exchange rate markets.
- When the spread between official and parallel rates is substantial and sustained, domestic price levels typically reflect the parallel market exchange rate rather than the official rate.
- Allowing the use of a market-clearing exchange rate ("recognizing reality") can benefit economic activity without necessarily producing higher inflation—conditional on accompanying policies.
- Exchange rate unification by itself is insufficient to stabilize the exchange rate; stabilization requires a supportive fiscal and monetary context.

### Policy implications and recommendations
- Move toward a unified, market-clearing exchange rate to align official prices with market realities and support economic activity.
- Ensure fiscal and monetary policies are supportive to stabilize the unified exchange rate; unification without supportive macroeconomic context is unlikely to produce lasting stability.

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_Source: https://www.imf.org/en/publications/wp/issues/2021/02/06/recognizing-reality-unification-of-official-and-parallel-market-exchange-rates-50047_