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

44 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: March 1990

Abstract

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.

JEL Classification: 131, 431

Suggested Citation

Agenor, Pierre-Richard, Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework (March 1990). IMF Working Paper, Vol. , pp. 1-40, 1990. Available at SSRN: https://ssrn.com/abstract=884614

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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