Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries
Summary:
It is often argued that the parallel market premium is a useful indicator of real exchange rate misalignment in developing countries. The empirical evidence does not, however, suggest the existence of a robust correlation between these two endogenous variables that is independent of the nature of economic shocks and various structural relationships in the economy. This paper presents an analytical investigation of the reliability of the parallel market premium as an indicator of real exchange rate misalignment in the context of a fully optimizing model of a developing country. The analysis suggests that one should exercise caution in drawing inferences about the sign and magnitude of real exchange rate misalignment from the parallel market premium.
Series:
Working Paper No. 1993/070
Subject:
Consumption Currency markets Exchange rates Real exchange rates Real interest rates
Notes:
Also published in Staff Papers, Vol. 41, No. 1, March 1994.
English
Publication Date:
August 1, 1993
ISBN/ISSN:
9781451960358/1018-5941
Stock No:
WPIEA0701993
Pages:
26
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