Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework
A model is developed incorporating trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Fully anticipated, expansionary credit and fiscal policies are associated with output and price increases, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. Speed of adjustment is inversely related to the degree of rationing in the official foreign exchange market. A once-for-all devaluation of the official rate has a negative effect on the parallel market premium in the short term, but none in the long term.
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Volume (Year): 37 (1990)
Issue (Month): 3 (September)
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