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Foreign Exchange Queues, Informal Traders, and a Zero Premium in the Black Market; A Cape Verdean Puzzle

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  • Jan-Peter Olters

Abstract

During 1996–98, several indicators hinted at the apparent unsustainability of Cape Verde’s exchange rate peg. The country, faced with a considerable backlog of approved but unmet applications for foreign currencies, tolerated a parallel market. Street traders, however, demanded only negligible premiums (if any at all) for foreign exchange. By integrating the emigrants’ transfer decisions into a basic Mundell-Fleming-type model, the author conjectures that this puzzle can be explained with the increasing use of transfer channels outside the banking system, leading to unrecorded inflows of foreign exchange. Analysis of the relevant balance of payments data appears to support this result.

Suggested Citation

  • Jan-Peter Olters, 1999. "Foreign Exchange Queues, Informal Traders, and a Zero Premium in the Black Market; A Cape Verdean Puzzle," IMF Working Papers 99/110, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:99/110
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    References listed on IDEAS

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    1. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    2. Dueker, Michael & Neely, Christopher J., 2007. "Can Markov switching models predict excess foreign exchange returns?," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 279-296, February.
    3. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
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    Cited by:

    1. International Monetary Fund, 2006. "Determinants of Emigrant Deposits in Cape Verde," IMF Working Papers 06/132, International Monetary Fund.

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