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Foreign Exchange Controls and the Parallel Market Premium

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  • Mohsen Fardmanesh
  • Seymour Douglas
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    Abstract

    This paper studies the relationship between the official and parallel exchange rates, using cointegration, Granger causality, and reduced form methods on data from three Caribbean countries, Jamaica, Guyana, and Trinidad & Tobago, for the period 1985-93. Where the central bank follows a passive policy of infrequent and large adjustments to the official rate, changes in the official rate Granger causes changes in the parallel rate, and larger disparities prevail between the two rates. Foreign exchange controls, expansionary fiscal and monetary policy, and changes of government mostly have a positive effect on the parallel market premium, with foreign exchange controls exerting the strongest impact. Copyright � 2008 The Authors; Journal compilation � 2008 Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Review of Development Economics.

    Volume (Year): 12 (2008)
    Issue (Month): 1 (02)
    Pages: 72-89

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    Handle: RePEc:bla:rdevec:v:12:y:2008:i:1:p:72-89

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=1363-6669

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    Cited by:
    1. Khemraj, Tarron & Pasha, Sukrishnalall, 2012. "Analysis of an unannounced foreign exchange regime change," Economic Systems, Elsevier, vol. 36(1), pages 145-157.

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