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

Pierre-Richard Agénor

No 1990/016, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; exchange rate; money stock; rate of change; rate of inflation; exchange rate differential; price level; rate of return; market rate; Currency markets; Exchange rates; Multiple currency practices; Currencies (search for similar items in EconPapers)
Pages: 44
Date: 1990-03-01
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Citations: View citations in EconPapers (9)

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