Foreign Exchange Queues, Informal Traders, and a Zero Premium in the Black Market: A Cape Verdean Puzzle

Jan-Peter Olters

No 1999/110, IMF Working Papers from International Monetary Fund

Abstract: During 1996–98, several indicators hinted at the apparent unsustainability of Cape Verde’s exchange rate peg. The country, faced with a considerable backlog of approved but unmet applications for foreign currencies, tolerated a parallel market. Street traders, however, demanded only negligible premiums (if any at all) for foreign exchange. By integrating the emigrants’ transfer decisions into a basic Mundell-Fleming-type model, the author conjectures that this puzzle can be explained with the increasing use of transfer channels outside the banking system, leading to unrecorded inflows of foreign exchange. Analysis of the relevant balance of payments data appears to support this result.

Keywords: WP; foreign currency; exchange rate; cash transfer; aggregate demand; balance of payments; Foreign exchange queues; black markets; unrequited transfers; foreign exchange queue; open economy; Currencies; Currency markets; Conventional peg; Informal economy; Western Europe (search for similar items in EconPapers)
Pages: 31
Date: 1999-08-01
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Citations: View citations in EconPapers (2)

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