Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange

A Formal Framework

• Author(s): Pierre-Richard Agénor,
• Publisher: International Monetary Fund
• Pages: 44
• ISBN_10: 1451923236
  ISBN_13: 9781451923230
  
• Language: en
• Categories: Business & Economics / Foreign Exchange , Business & Economics / Finance / General , Business & Economics / Exports & Imports ,

Description:... 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.