An Experiment with Official and Parallel Foreign Exchange Markets in a Developing Country

Publication: Journal of Economic Education

Volume: Volume 30, No. 4

Issue: Fall 1999

Pages: 392-401

Author(s): Denise Hazlett (Whitman College) and Jeela Ganje (Whitman College)

Address (Principal Author):Denise Hazlett, Assistant Professor, Department of Economics, Whitman College, Walla Walla, WA 99362, 509-527-5155, fax: 509-527-5026

Internet Address (Principal Author):hazlett@whitman.edu

Title: An Experiment with Official and Parallel Foreign Exchange Markets in a Developing Country

Abstract: Students take the roles of importers and exporters in a developing country. The experiment shows how international trade falls if the government tries to maintain an overvalued currency without expending international reserves. It also shows that the exchange rate in a parallel market without penalties (a gray market) approximates the free market value of the currency, whereas the black market rate need not do so.