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The Parallel Market Premium: Is It a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries?

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Listed:
  • Peter J. Montiel

    (International Monetary Fund)

  • Jonathan D. Ostry

    (International Monetary Fund)

Abstract

It is often argued that the parallel market premium is a useful indicator of real exchange rate misalignment in developing countries. The empirical evidence, however, does not suggest a robust correlation between these two endogenous variables that is independent of the nature of economic shocks and various structural relationships in the economy. This paper analyzes the reliability of the parallel market premium as an indicator of real exchange rate misalignment. It suggests that one should exercise caution in drawing inferences about the sign and magnitude of real exchange rate misalignment from the premium.

Suggested Citation

  • Peter J. Montiel & Jonathan D. Ostry, 1994. "The Parallel Market Premium: Is It a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries?," IMF Staff Papers, Palgrave Macmillan, vol. 41(1), pages 55-75, March.
  • Handle: RePEc:pal:imfstp:v:41:y:1994:i:1:p:55-75
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    Citations

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    Cited by:

    1. Martin Petri & Tahsin Saadi-Sedik, 2006. "To Smooth or Not to Smooth—The Impact of Grants and Remittances on the Equilibrium Real Exchange Rate in Jordan," IMF Working Papers 06/257, International Monetary Fund.
    2. Holtemöller, Oliver & Mallick, Sushanta, 2013. "Exchange rate regime, real misalignment and currency crises," Economic Modelling, Elsevier, vol. 34(C), pages 5-14.
    3. Aykut Kibritcioglu & Bengi Kibritcioglu, 2004. "Real Exchange Rate Misalignment in Turkey, 1987-2003 (in Turkish)," Macroeconomics 0403006, University Library of Munich, Germany, revised 22 Apr 2004.
    4. Teferi, Mequaninite, 2008. "Measuring the real exchange rate misalignment of Ethiopia," Ethiopian Journal of Economics, Ethiopian Economics Association, vol. 0(Number 2), pages 1-68, May.
    5. Salehizadeh, Mehdi & Taylor, Robert, 1999. "A test of purchasing power parity for emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 183-193, April.
    6. Fuhmei Wang, 2009. "The effects of foreign borrowing policies on economic growth: success or failure?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 12(4), pages 273-284.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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