Parallel Exchange Rates in Developing Countries

Kiguel and O’Connell, 1995.

Dual exchange rates and black markets for foreign exchange are common in developing countries, and a body of evidence is beginning to emerge on the effects that such parallel foreign exchange systems have on macro-economic performance. This article presents a simple typology of parallel systems, discusses their emergence, and looks at why countries prefer these arrangements to the main alternatives. The article examines the ability of parallel markets to insulate international reserves and domestic prices from shocks to the balance of payments.