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Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange; A Formal Framework

  • Pierre-Richard Agénor
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    The paper develops and tests a model of a developing economy that incorporates trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Temporary expansionary demand policies are associated with an increase in output and prices, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. The speed of adjustment is inversely related to the degree of rationing in the official foreign currency market. A once-for–all devaluation of the official exchange rate has no long-term effect on the premium.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/16.

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    Length: 44
    Date of creation: 01 Mar 1990
    Date of revision:
    Handle: RePEc:imf:imfwpa:90/16
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