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

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  • Pierre-Richard Agénor

    (International Monetary Fund)

Abstract

A model is developed incorporating trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Fully anticipated, expansionary credit and fiscal policies are associated with output and price increases, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. Speed of adjustment is inversely related to the degree of rationing in the official foreign exchange market. A once-for-all devaluation of the official rate has a negative effect on the parallel market premium in the short term, but none in the long term.

Suggested Citation

  • Pierre-Richard Agénor, 1990. "Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 560-592, September.
    • Handle: RePEc:pal:imfstp:v:37:y:1990:i:3:p:560-592
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    Cited by:

    1. Ozatay, Fatih, 2000. "A quarterly macroeconometric model for a highly inflationary and indebted country: Turkey," Economic Modelling, Elsevier, vol. 17(1), pages 1-11, January.
    2. Kamin, Steven B., 1995. "Contractionary devaluation with black markets for foreign exchange," Journal of Policy Modeling, Elsevier, vol. 17(1), pages 39-57, February.
    3. Özdemir, K. Azim & Turner, Paul, 2008. "A Monetary Disequilibrium Model for Turkey: Investigation of a Disinflationary Fiscal Rule and its Implications for Monetary Policy," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 349-361.
    4. Lopez-Calix, Jose R., 1998. "Are Pick data on parallel exchange rates misleading?," Economics Letters, Elsevier, vol. 59(2), pages 223-230, May.
    5. Subrata Ghatak & Jalal Siddiki, 2001. "The use of the ARDL approach in estimating virtual exchange rates in India," Journal of Applied Statistics, Taylor & Francis Journals, vol. 28(5), pages 573-583.
    6. Ameyaw, Samuel Donyina, 2004. "A Small Macroeconometric Model of Trade and Inflation in Ghana," Economic Research Papers 269590, University of Warwick - Department of Economics.
    7. Peterson, Everett B., 2003. "Incorporating Domestic Marketing Margins into the GTAP Model," Conference papers 331123, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    8. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
    9. Clement Yuk Pang Wong, 1997. "Black Market Exchange Rates And Capital Mobility In Asian Economies," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 21-36, January.
    10. Amit Biswas & Sugata Marjit, 2005. "Mis-invoicing and Trade Policy," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 8(3), pages 189-205.

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