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Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia, Volume 1
Author:Aron, Janine; Elbadawi, Ibrahim A.; Country:Zambia;
Date Stored:2001/04/18Document Date:1992/05/31
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; Macroeconomic Management; Economic Theory & Research; Economic Stabilization; Fiscal & Monetary Policy
Language:EnglishMajor Sector:(Historic)Economic Policy
Region:AfricaReport Number:WPS909
Sub Sectors:Macro/Non-TradeCollection Title:Policy, Research working papers ; no. WPS 909. Macroeconomic adjustment and growth
Volume No:1  

Summary: A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.

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