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Collapsing exchange rate regimes in the presence of a parallel market

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Abstract:

This paper develops a model of an economy where the fixed exchange rate is overvalued and coexists with a parallel market for foreign currency. Such a situation persists because the parallel marker is used by the central authorities as an instrument to delay policy changes. Using the Haitian experience, this paper estimates a rationing parameter of foreign currency in the official market which translates the extent of tolerance of the parallel market. The paper also produces estimates of onestep-ahead probability of devaluation. Rationing has been severe and the probability of collapse has reached high levels during the period studied.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/000368400322282

Publication date: May 15, 2000

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