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Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia

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Author Info
Aron, Janine
Elbadawi, Ibrahim A.

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Abstract

A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 909.

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Date of creation: 31 May 1992
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Handle: RePEc:wbk:wbrwps:909

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Keywords: Environmental Economics&Policies Fiscal&Monetary Policy Macroeconomic Management Economic Theory&Research Economic Stabilization

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Edwards, Sebastian & Tabellini, Guido, 1991. "The political economy of fiscal policy and inflation in developing countries : an empirical analysis," Policy Research Working Paper Series 703, The World Bank. [Downloadable!]
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  3. Saul Lizondo, Jose, 1987. "Unification of dual exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 57-77, February. [Downloadable!] (restricted)
  4. Pinto, Brian, 1988. "Black market premia, exchange rate unification, and inflation in sub-Saharan Africa," Policy Research Working Paper Series 37, The World Bank. [Downloadable!]
  5. Rudiger Dornbusch, 1986. "Special Exchange Rates for Capital Account Transactions," NBER Working Papers 1659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Bates, Robert H & Collier, Paul, 1995. "The Politics and Economics of Policy Reform in Zambia," Journal of African Economies, Oxford University Press, vol. 4(1), pages 115-43, May.
  7. Elbadawi, I.A., 1989. "Terms Of Trade, Commercial Policy, And The Black Market For Foreign Exchange: An Empirical Model Of Real Exchange Rate Determination," Papers 570, Yale - Economic Growth Center.
  8. Rodriguez, Carlos Alfredo, 1989. "Macroeconomic policies for structural adjustment," Policy Research Working Paper Series 247, The World Bank. [Downloadable!]
  9. 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)
  10. Jagdish Bhagwati, 1981. "Alternative theories of illegal trade : Economic consequences and statistical detection," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 117(3), pages 409-427, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Howard White, 2005. "Dollars, dialogue and development: an evaluation of Swedish program aid," Development and Comp Systems 0511012, EconWPA. [Downloadable!]
  2. Aron, Janine & Elbadawi, Ibrahim, 1994. "Foreign exchange auction markets in sub-Saharan Africa : dynamic models for auction exchange rates," Policy Research Working Paper Series 1396, The World Bank. [Downloadable!]
  3. Kiguel, Miguel A. & O'Connell, Stephen A., 1994. "Parallel exchange rates in developing countries : lessons from eight case studies," Policy Research Working Paper Series 1265, The World Bank. [Downloadable!]
  4. Mkenda, Beatrice Kalinda, 2001. "Long-run and Short-run Determinants of the Real Exchange Rate in Zambia," Working Papers in Economics 40, Göteborg University, Department of Economics. [Downloadable!]
  5. Aron, Janine & Elbadawi, Ibrahim, 1994. "A typology of foreign auction markets in sub-Saharan Africa," Policy Research Working Paper Series 1395, The World Bank. [Downloadable!]
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