Parallel Market Premia and Misalignment of Official Exchange Rates
AbstractDue to restrictive foreign exchange policy and active parallel markets for foreign exchange in some developing countries, it is often believed that the real official exchange rate is undervalued (overvaluing in domestic currency). Since an overvalued domestic currency depresses official current account below its equilibrium level, while an undervalued domestic currency may be inflationary, it is important to be able to detect real official rate misalignment as early as possible.This is difficult in economies where parallel markets for foreign currencies are well established, and where it is therefore to observe underlying capital flows.We show that the direction of real official rate misalignment is identfiable without knowing the size of capital flow in the parallel market. We indicate that a change in the parallel market premium is an appropriate indicator of change in real official rate misalignment.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 15537.
Date of creation: 02 Jun 1997
Date of revision:
Foreign exchange markets; Official rate; parallell rate;
Find related papers by JEL classification:
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- A10 - General Economics and Teaching - - General Economics - - - General
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