This volume reviews the nature and scope of informal financial
markets in developing countries and elaborates on the theoretical and
conceptual models which analyse 'financial repression' and other aspects
of government intervention in financial markets. It also focuses on the
consequences which the prevalence of informal financial markets in
developing countries may have for monetary and exchange rate policy. In
particular, it attempts to capture the functioning of informal,
unregulated markets into macroeconomic models, working towards a general
eqUilibrium model with informal financial markets. Two types of informal
markets are analysed. The first are for informal lending at terms and
conditions which differ greatly from those prevailing in the official
banking system. The second are the 'parallel' markets for foreign
exchange which tend to emerge in response to quantity restrictions on
trade and administered allocation of foreign exchange to certain users
at official rates, which are well below those on the parellel markets.
The key question is whether these informal markets change the efficacy
of monetary and credit policy-and, if they do, to what extent and in
what direction? Two supporting appendices present econometric analyses
of the efficiency of parallel currency markets and the degree of capital
mobility in developing countries.
Exchange rate determination and the flaws of mainstream monetary theory
