The Parallel Foreign Exchange Market And Macroeconomic Performance In Ethiopia

Abstract

This paper looks into the changes of the parallel premium in relation to the movements of macroeconomic variables. The parallel foreign exchange market arises as a direct consequence of the adoption of exchange rate controls in many developing economies facing substantial macroeconomic imbalances. It attempts to 1 Find out the determinants of the parallel premium based on a stock-flow model, 2 Examine the impact of the parallel premium on merchandise exports and 3 Investigate whether inflation causes the parallel exchange rate. The estimation results reveal that the parallel premium has a negative effect on merchandise exports and its long-mn determinants are real money balances, the real effective exchange rate and inflow of aid (grants). On the other hand, the terms of trade negatively affect the premium only in the short run. In addition, inflation is found to cause the parallel exchange rate for the period under consideration.

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