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Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange

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  • Pierre-Richard Agénor
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    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.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/16.

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    Length: 44
    Date of creation: 01 Mar 1990
    Date of revision:
    Handle: RePEc:imf:imfwpa:90/16

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    Cited by:
    1. Subrata Ghatak & Jalal Siddiki, 2001. "The use of the ARDL approach in estimating virtual exchange rates in India," Journal of Applied Statistics, Taylor & Francis Journals, vol. 28(5), pages 573-583.
    2. Özdemir, K. Azim & Turner, Paul, 2008. "A Monetary Disequilibrium Model for Turkey: Investigation of a Disinflationary Fiscal Rule and its Implications for Monetary Policy," Journal of Policy Modeling, Elsevier, vol. 30(2), pages 349-361.
    3. Ozatay, Fatih, 2000. "A quarterly macroeconometric model for a highly inflationary and indebted country: Turkey," Economic Modelling, Elsevier, vol. 17(1), pages 1-11, January.
    4. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.
    5. Kamin, Steven B., 1995. "Contractionary devaluation with black markets for foreign exchange," Journal of Policy Modeling, Elsevier, vol. 17(1), pages 39-57, February.

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