The Parallel Exchange Rate and the Premium in Ethiopia
No Thumbnail Available
Date
1996-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
In response to excess demand for foreign exchange in the official market, parallel
markets for foreign exchange develop . The emergence and existence of active parallel
foreign exchange market creates several complications to policy makers in their attempt
to regulate the external balance. That is, variation in the parallel exchange rate and the
premium affect the level of international reserves.
Ethiopia had high parallel premium for foreign exchange for 1973-1993 period and
moderate premium in 1972, 1994 and 1995. As to what determines the movement in the
behavior of the parallel exchange rate and the premium in Ethiopia is the objective of
this study to investigate.
Accordingly, stock-flow model is adopted to find out the determinants of the
variation in the parallel premium while simultaneous equation smuggling model is used
to investigate the determinants of the parallel exchange rate in Ethiopia.
By employing the above models, the study came out with the result that real official
exchange rate, real money balance, import tariff rate, real output and one year lagged
level of the premium are the determinants of the variation in the spread between the
parallel and the official exchange rates in the long-run while its short-run determinants
are found to be real official exchange rate, import tariff rate, and one period lagged level
of the premium. On the other hand, the movement in the parallel exchange rate is found
to be determined by desired imports, trade restrictions and enforcement of exchange
control, and trade and exchange rate policy reforms. Hence, policy makers should take
into account the found determinants of the parallel exchange rate and the premium so as
to formulate sound exchange rate policy, i. e., in order to reduce the parallel premium to
insignificant level or to unify the official and the parallel exchange rates of Ethiopia.
Description
Keywords
Exchange Rate and the Premium in Ethiopia