Parallel Exchange Rates In Developing Countries: Lessons From Eight Case Studies

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Book Chapter

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Parallel Exchange Rates In Developing Countries


Parallel foreign exchange systems are those in which a market-determined exchange rate, typically applying to financial transactions but often to a portion of trade transactions as well, coexists with one or more pegged exchange rates. Such arrangements are common in developing countries. In some cases governments respond to a balance of payments crisis by creating a legal parallel (or dual) foreign exchange market for financial transactions. The objective is to avoid the short-term effects of a depreciation of the exchange rate on domestic prices while maintaining some degree of control over capital outflows and international reserves. In other cases, extensive controls on foreign exchange restrict access to official markets and lead to the emergence of an illegal parallel market. The illegal market then grows in importance as the authorities respond to a deteriorating balance of payments by tightening and extending exchange controls.

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St. Martin's Press


M. A. Kiguel, J. S. Lizondo, And Stephen A. O'Connell

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