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Parallel Market Premia and Misalignment of Official Exchange Rates

Author

Listed:
  • Onour, Ibrahim
  • Cameron, Norman

Abstract

Due to restrictive foreign exchange policy and active parallel markets for foreign exchange in some developing countries, it is often believed that the real official exchange rate is undervalued (overvaluing in domestic currency). Since an overvalued domestic currency depresses official current account below its equilibrium level, while an undervalued domestic currency may be inflationary, it is important to be able to detect real official rate misalignment as early as possible.This is difficult in economies where parallel markets for foreign currencies are well established, and where it is therefore to observe underlying capital flows.We show that the direction of real official rate misalignment is identfiable without knowing the size of capital flow in the parallel market. We indicate that a change in the parallel market premium is an appropriate indicator of change in real official rate misalignment.

Suggested Citation

  • Onour, Ibrahim & Cameron, Norman, 1997. "Parallel Market Premia and Misalignment of Official Exchange Rates," MPRA Paper 15537, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:15537
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    File URL: https://mpra.ub.uni-muenchen.de/15537/1/MPRA_paper_15537.pdf
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    References listed on IDEAS

    as
    1. Kiguel, Miguel & O'Connell, Stephen A, 1995. "Parallel Exchange Rates in Developing Countries," World Bank Research Observer, World Bank Group, vol. 10(1), pages 21-52, February.
    2. Ibrahim Onour, 2000. "Unification of Dual Foreign Exchange Markets," Economic Change and Restructuring, Springer, vol. 33(3), pages 171-184, October.
    3. Rudiger Dornbusch & Daniel Valente Dantas & Clarice Pechman & Roberto de Rezende Rocha & Demetrio SimÃ…es, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 25-40.
    4. Chander Kant, 2002. "What is Capital Flight?," The World Economy, Wiley Blackwell, vol. 25(3), pages 341-358, March.
    5. Saul Lizondo, Jose, 1987. "Unification of dual exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 57-77, February.
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    Citations

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    Cited by:

    1. repec:eee:riibaf:v:41:y:2017:i:c:p:547-555 is not listed on IDEAS
    2. Coppola,Andrea & Lagerborg,Andresa & Mustafaoglu,Zafer, 2016. "Estimating an equilibrium exchange rate for the Argentine Peso," Policy Research Working Paper Series 7682, The World Bank.
    3. Onour, Ibrahim, 2010. "South Sudan Referundum: A Macroeconomic Analysis of Post-Secession Scenario," MPRA Paper 29897, University Library of Munich, Germany.
    4. Ibrahim Onour, 2000. "Unification of Dual Foreign Exchange Markets," Economic Change and Restructuring, Springer, vol. 33(3), pages 171-184, October.
    5. Onour, Ibrahim, 2011. "Financial stability in small open economy under political uncertainty," MPRA Paper 29883, University Library of Munich, Germany.

    More about this item

    Keywords

    Foreign exchange markets; Official rate; parallell rate;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • A10 - General Economics and Teaching - - General Economics - - - General

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