Is the Parallel Market Premium a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries

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 ec...

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Bibliographic Details
Main Author: Ostry, Jonathan
Other Authors: Montiel, Peter
Format: eBook
Language:English
Published: Washington, D.C. International Monetary Fund 1993
Series:IMF Working Papers
Subjects:
Online Access:
Collection: International Monetary Fund - Collection details see MPG.ReNa
Description
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
Physical Description:26 pages
ISBN:9781451960358