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

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  • Aron, Janine
  • Elbadawi, Ibrahim A.

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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Bibliographic Info

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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Related research

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

References

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  1. Dornbusch, Rudiger, 1986. "Special Exchange Rates for Capital Account Transactions," World Bank Economic Review, World Bank Group, vol. 1(1), pages 3-33, September.
  2. Bates, Robert H & Collier, Paul, 1995. "The Politics and Economics of Policy Reform in Zambia," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 4(1), pages 115-43, May.
  3. 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.
  4. Calvo, Guillermo A., 1987. "On the costs of temporary policy," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 245-261, October.
  5. 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.
  6. Rodriguez, Carlos Alfredo, 1989. "Macroeconomic policies for structural adjustment," Policy Research Working Paper Series 247, The World Bank.
  7. Garnaut, Ross & Clunies-Ross, Anthony, 1983. "Taxation of Mineral Rents," OUP Catalogue, Oxford University Press, edition 1, number 9780198284543, Octomber.
  8. 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.
  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.
  10. Saul Lizondo, Jose, 1987. "Unification of dual exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 57-77, February.
  11. 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.
  12. Pinto, Brian, 1988. "Black market premia, exchange rate unification, and inflation in sub-Saharan Africa," Policy Research Working Paper Series 37, The World Bank.
  13. Jeffrey D. Sachs, 1989. "Developing Country Debt and the World Economy," NBER Books, National Bureau of Economic Research, Inc, number sach89-3.
  14. Donogh C. McDonald, 1985. "Trade Data Discrepancies and the Incentive to Smuggle: An Empirical Analysis (Divergences dans les données sur les échanges commerciaux et attrait de la contrebande: analyse empirique) (Discrepa," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 668-692, December.
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Citations

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Cited by:
  1. Ndlela, Thandinkosi, 2010. "Implications of real exchange rate misalignment in developing countries: theory, empirical evidence and application to growth performance in Zimbabwe," MPRA Paper 32710, University Library of Munich, Germany.
  2. 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.
  3. Aron, Janine & Elbadawi, Ibrahim, 1994. "A typology of foreign exchange auction markets in sub-Saharan Africa : dynamic models for auction exchange rates," Policy Research Working Paper Series 1396, The World Bank.
  4. Howard White, 2005. "Dollars, dialogue and development: an evaluation of Swedish program aid," Development and Comp Systems 0511012, EconWPA.
  5. Mkenda, Beatrice Kalinda, 2001. "Long-run and Short-run Determinants of the Real Exchange Rate in Zambia," Working Papers in Economics 40, University of Gothenburg, Department of Economics.
  6. Morris, Stephen, 1995. "Inflation dynamics and the parallel market for foreign exchange," Journal of Development Economics, Elsevier, vol. 46(2), pages 295-316, April.
  7. Aron, Janine & Elbadawi, Ibrahim, 1994. "A typology of foreign auction markets in sub-Saharan Africa," Policy Research Working Paper Series 1395, The World Bank.

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