MACROECONOMIC ADJUSTMENT IN EXTERNALLY DEPENDENT ECONOMIES WITH PARALLEL EXCHANGE MARKETS
This paper developes a model of the macroeconomic response to a monetary shock in an externally dependent economy with a black market for foreign exchange. A model of the currency substitution genre is used to describe how monetary signals may be transmitted through a black market rate and the supply side of the economy to real output. The model demonstrates that monetary contraction may have an expansionary supply side influence, and that this effect is stronger in the more dependent economies. The model also shows that devalu ation is not neutral with respect to the black market premium.