Macroeconomic Management with Informal Financial Markets

Abstract

Informal credit and foreign currency markets are a widespread phenomenon in developing countries. This paper begins by reviewing the scope and nature of these markets, and the channels through which they operate. It then examines their implications for macroeconomic management, particularly in the areas of monetary and exchange rate policies, interest rate liberalization, and foreign exchange market unification. The analysis emphasizes the importance of accounting for the presence of informal markets in the design of macroeconomic reform programmes.

Dollarization Persistence and Individual Heterogeneity

“…An exception isSturzenegger (1997) who studies the implications of income inequality on currency substitution, yet with no reference to deposit dollarization.7 Agénor and Haque (1996) provide an account of informal currency markets. 8 Even large firms may find it profitable to trade with a pool of (well-organized) cambistas.…”