THE PARALLEL MARKET PREMIUM - IS IT A RELIABLE INDICATOR OF REAL EXCHANGE-RATE MISALIGNMENT IN DEVELOPING-COUNTRIES

It is often argued that the parallel market premium is a useful indica tor of real exchange rate misalignment in developing countries. The em pirical evidence, however, does not suggest a robust correlation betwe en these two endogenous variables that is independent of the nature of economic shocks and various structural relationships in the economy. This paper analyzes the reliability of the parallel market premium as an indicator of real exchange rate misalignment. It suggests that one should exercise caution in drawing inferences about the sign and magni tude of real exchange rate misalignment from the premium.