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

March 1, 1990

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

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.

Subject: Currencies, Currency markets, Exchange rates, Financial markets, Foreign assets, Foreign exchange, Money, Multiple currency practices

Keywords: Currencies, Currency markets, exchange rate, exchange rate differential, Exchange rates, market rate, money stock, Multiple currency practices, price level, rate of change, rate of inflation, rate of return, WP

Pages:
44
Volume:
1990
DOI:
https://doi.org/10.5089/9781451923230.001
Issue:
016
Series:
Working Paper No. 1990/016
Stock No:
WPIEA0161990
ISBN:
9781451923230
ISSN:
1018-5941

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Notes

Also published in Staff Papers, Vol. 37, No. 3, September 1990.

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