Parallel Market Premia and Misalignment of Official Exchange Rates

Ibrahim Onour and Norman Cameron

MPRA Paper from University Library of Munich, Germany

Abstract: Due to restrictive foreign exchange policy and active parallel markets for foreign exchange in some developing countries, it is often believed that the real official exchange rate is undervalued (overvaluing in domestic currency). Since an overvalued domestic currency depresses official current account below its equilibrium level, while an undervalued domestic currency may be inflationary, it is important to be able to detect real official rate misalignment as early as possible.This is difficult in economies where parallel markets for foreign currencies are well established, and where it is therefore to observe underlying capital flows.We show that the direction of real official rate misalignment is identfiable without knowing the size of capital flow in the parallel market. We indicate that a change in the parallel market premium is an appropriate indicator of change in real official rate misalignment.

Keywords: Foreign exchange markets; Official rate; parallell rate (search for similar items in EconPapers)
JEL-codes: A10 C02 C50 (search for similar items in EconPapers)
Date: 1997-06-02
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Citations: View citations in EconPapers (5)

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