Determination Of Efficiency Exchange Rate And The Premium Of The Parallel Market For Foreign Currency In Burundi

Although Burundi is a moderate premium country, the parallel market for foreign currencyrnhas been operating for a number of decades. This was in response to the move by Burundi'srnauthorities to impose trade and exchange controls as a way of managing economic imbalancesrnin the early 1960s. This paper investigates the functioning of the market and its implications onrnthe economy, based on an econometric approach.rnBoth the random walk model and the Lung-Box test reveal that the parallel market forrnforeign currency in Burundi is efficient. Furthermore, a simultaneous equation model is used tornisolate the main determinants of the parallel rate. Moreover, a stock/flow model is applied torninvestigate the main factors behind the determination of the premium. It is found that flowrnvariables are by far the most important factors. The model also leads to the finding that thernpremium has a long-run and short-run behavior. On the basis of these findings, policy actionsrnare recommended.

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