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

Author

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  • Mr. Jonathan David Ostry
  • Mr. Peter J Montiel

Abstract

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.

Suggested Citation

  • Mr. Jonathan David Ostry & Mr. Peter J Montiel, 1993. "Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries," IMF Working Papers 1993/070, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1993/070
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    Cited by:

    1. Coppola,Andrea & Lagerborg,Andresa & Mustafaoglu,Zafer, 2016. "Estimating an equilibrium exchange rate for the Argentine Peso," Policy Research Working Paper Series 7682, The World Bank.
    2. Hakan Kara & Hande Kucuk Tuger & Umit Ozlale & Burc Tuger & Devrim Yavuz & Eray M. Yucel, 2005. "Exchange Rate Pass-Through in Turkey : Has it Changed and to What Extent?," Working Papers 0504, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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    Keywords

    WP; exchange rate;

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