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Recognizing Reality—Unification of Official and Parallel Market Exchange Rates

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  • Mr. Simon T Gray

Abstract

Some central banks have maintained overvalued official exchange rates, while unable to ensure that supply of foreign exchange meets legitimate demand for current account transactions at that price. A parallel exchange rate market develops, in such circumstances; and when the spread between the official and parallel rates is both substantial and sustained, price levels in the economy typically reflect the parallel market exchange rate. “Recognizing reality” by allowing economic agents to use a market clearing rate benefits economic activity without necessarily leading to more inflation. But a unified, market-clearing exchange rate will not stabilize without a supportive fiscal and monetary context. A number of country case studies are included; my thanks to Jie Ren for pulling together all the data for the country case studies, and the production of the charts.

Suggested Citation

  • Mr. Simon T Gray, 2021. "Recognizing Reality—Unification of Official and Parallel Market Exchange Rates," IMF Working Papers 2021/025, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/025
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    Cited by:

    1. Ricardo Hausmann & Tim O'Brien & Timothy Cheston & Ibrahim Worku Hassen & Can Soylu & Kishan Shah & Nikita Taniparti & Pankhuri Prasad & Pablo Andrés Neumeyer, 2022. "Development in a Complex World: The Case of Ethiopia," Growth Lab Working Papers 202, Harvard's Growth Lab.
    2. Kehinde Mary Bello, 2024. "Parallel exchange rate market and macroeconomic performance in Nigeria: SVAR approach," SN Business & Economics, Springer, vol. 4(11), pages 1-24, November.
    3. Graf von Luckner, Clemens & Reinhart, Carmen M. & Rogoff, Kenneth, 2023. "Decrypting new age international capital flows," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 104-122.

    More about this item

    Keywords

    exchange rate unification; parallel markets; WP; market-clearing rate; market rate; exchange rate weakness; managed float; market-clearing exchange rate;
    All these keywords.

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