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

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.
Publication date: March 1990
ISBN: 9781451923230
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Inflation , Money and Monetary Policy , foreign exchange , exchange rate , inflation , foreign currency , parallel exchange rate

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