IMF Working Papers

Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries

By Jonathan David Ostry, Peter J Montiel

August 1, 1993

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Format: Chicago

Jonathan David Ostry, and Peter J Montiel. Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries, (USA: International Monetary Fund, 1993) accessed November 23, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

It is often argued that the parallel market premium is a useful indicator of real exchange rate misalignment in developing countries. The empirical evidence does not, however, suggest the existence of a robust correlation between these two endogenous variables that is independent of the nature of economic shocks and various structural relationships in the economy. This paper presents an analytical investigation of the reliability of the parallel market premium as an indicator of real exchange rate misalignment in the context of a fully optimizing model of a developing country. The analysis suggests that one should exercise caution in drawing inferences about the sign and magnitude of real exchange rate misalignment from the parallel market premium.

Subject: Consumption, Currency markets, Exchange rates, Real exchange rates, Real interest rates

Keywords: Exchange rate, WP

Publication Details

  • Pages:

    26

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 1993/070

  • Stock No:

    WPIEA0701993

  • ISBN:

    9781451960358

  • ISSN:

    1018-5941

Notes

Also published in Staff Papers, Vol. 41, No. 1, March 1994.

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