Parallel Market Premia and Misalignment of Official Exchange Rates

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Parallel Market Premia and Misalignment of Official Exchange Rates

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Onour, Ibrahim
Cameron, Norman

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Ibrahim Ahmed Onour

Abstract

Due 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15537.

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Date of creation: 02 Jun 1997
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Handle: RePEc:pra:mprapa:15537

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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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Kiguel, Miguel & O'Connell, Stephen A, 1995. "Parallel Exchange Rates in Developing Countries," World Bank Research Observer, Oxford University Press, vol. 10(1), pages 21-52, February.
Chander Kant, 2002. "What is Capital Flight?," The World Economy, Blackwell Publishing, vol. 25(3), pages 341-358, 03. [Downloadable!] (restricted)
Saul Lizondo, Jose, 1987. "Unification of dual exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 57-77, February. [Downloadable!] (restricted)
Dornbusch, Rudiger, et al, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 25-40, February. [Downloadable!] (restricted)

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