ESSAYS IN INTERNATIONAL FINANCE

[Pages:10]ESSAYS IN INTERNATIONAL FINANCE

ESSAYS IN INTERNATIONAL FINANCE are published by the International Finance Section of the Department of Economics of Princeton University. The Section sponsors this series of publications, but the opinions expressed are those of the authors. The Section welcomes the submission of manuscripts for publication in this and its other series. Please see the Notice to Contributors at the back of this Essay.

The author of this Essay, Pierre-Richard Ag?nor, is an economist in the Research Department of the International Monetary Fund. His recent work has focused ont he macroeconomic implications of informal financial markets in developing countries, the theory of balance-of-payments crises, and the role of credibility factors in the effectiveness of stabilization programs.

PETER B. KENEN, Director International Finance Section

INTERNATIONAL FINANCE SECTION EDITORIAL STAFF

Peter B. Kenen, Director Margaret B. Riccardi, Editor Lillian Spais, Editorial Aide Lalitha H. Chandra, Subscriptions and Orders

Library of Congress Cataloging-in-Publication Data

Ag?nor, Pierre-Richard.

Parallel currency markets in developing countries : theory, evidence, and policy

implications / Pierre-Richard Ag?nor.

p. cm. -- (Essays in international finance, ISSN 0071-142X ; no. 188)

Includes bibliographical references.

ISBN 0-88165-095-1 (pbk.) : $6.50

1. Foreign exchange--Developing countries. I. Title. II. Series.

HG136.P7 no. 188

[HG3877]

332.042 s--dc20

[332.45091724]

92-32099

CIP

Copyright ? 1992 by International Finance Section, Department of Economics, Princeton University.

All rights reserved. Except for brief quotations embodied in critical articles and reviews, no part of this publication may be reproduced in any form or by any means, including photocopy, without written permission from the publisher.

Printed in the United States of America by Princeton University Press at Princeton, New Jersey

International Standard Serial Number: 0071-142X International Standard Book Number: 0-88165-095-1 Library of Congress Catalog Card Number: 92-32099

CONTENTS

1 INTRODUCTION

1

2 THE SCOPE AND NATURE OF PARALLEL

CURRENCY MARKETS

2

Emergence of Parallel Markets

2

Supply and Demand for Foreign Currency

7

Welfare Implications of Parallel Markets

10

3 DETERMINANTS OF PARALLEL EXCHANGE RATES:

THEORY

13

4 POLICY ISSUES WITH PARALLEL CURRENCY MARKETS

16

Effectiveness of Exchange Controls

17

Devaluations and Parallel-Market Premia

18

Unification of Foreign-Exchange Markets

23

5 CONCLUDING REMARKS

30

REFERENCES

31

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