Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework

Pierre-Richard Agénor
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Pierre-Richard Agénor: International Monetary Fund
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IMF Staff Papers, 1990, vol. 37, issue 3, 560-592

Abstract: A model is developed incorporating trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Fully anticipated, expansionary credit and fiscal policies are associated with output and price increases, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. Speed of adjustment is inversely related to the degree of rationing in the official foreign exchange market. A once-for-all devaluation of the official rate has a negative effect on the parallel market premium in the short term, but none in the long term.

Date: 1990
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