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Terms of Trade, Commercial Policy, and the Parallel Market for Foreign Exchange: An Empirical Model of the Real Exchange Rate

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  • Ibrahim A. Elbadawi

    (The World Bank)

Abstract

A model of real exchange rate RER) determination is presented. The model permits long-run equilibrium movements in RER to be distinguished from its short-run disequilibrium dynamics. An important aspect of the model is that is explicitly considers the parallel market premium as one of the fundamental determinants of RER. Especially in economies plagued with persistent excess aggregate demand, and rapidly depreciating domestic currency under a regime characterized with currency inconvertibility and highly regulated current account transactions, the parallel market is usually a persistent and a growing part of the economy. The model is then applied to the case of the Sudan; which like many African countries, closely approximates the economic environments described above.

Suggested Citation

  • Ibrahim A. Elbadawi, 1992. "Terms of Trade, Commercial Policy, and the Parallel Market for Foreign Exchange: An Empirical Model of the Real Exchange Rate," Journal of African Development, African Finance and Economic Association (AFEA), vol. 1(2), pages 1-26.
    • Handle: RePEc:afe:journl:v:1:y:1992:i:2:p:1-26
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    Cited by:

    1. Michael Effah Asamoah & Imhotep Paul Alagidede & Frank Adu, 2022. "Exchange rate uncertainty and foreign direct investment in Africa: Does financial development matter?," Review of Development Economics, Wiley Blackwell, vol. 26(2), pages 878-898, May.
    2. Warren Moraghen & Boopen Seetanah & Noor Ul Haq Sookia, 2023. "The impact of exchange rate and exchange rate volatility on Mauritius foreign direct investment: A sector‐wise analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 208-224, January.

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