Exchange Restrictions and Devaluation Crises

September 1, 1990

Preview Citation

Format: Chicago

Pierre-Richard Agénor. Exchange Restrictions and Devaluation Crises, (USA: International Monetary Fund, 1990) accessed September 27, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper develops a model of devaluation crises for an economy where foreign exchange restrictions lead to the emergence of a parallel market. The devaluation rule relates the size of the parity change to the spread between the official and parallel exchange rates. The mechanism that triggers the devaluation relates credit policy and the inflation tax. A credit expansion leads to an increase in the spread and possibly to a fall in inflation tax revenue, as agents switch away from domestic currency holdings. A devaluation reverses temporarily the process of erosion of the tax base if the associated fall in the premium raises the credibility of the new parity.

Subject: Conventional peg, Currencies, Domestic credit, Exchange rates, Multiple currency practices

Keywords: Exchange rate, Foreign currency, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1990/084
Stock No:

WPIEA0841990
ISBN:

9781451954340
ISSN:

1018-5941

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