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Title:The equilibrium exchange rate on the second-tier market in the presence of black market dealings in foreign exchange
Author:Olopoenia, Razaq A.
Periodical:The Nigerian Journal of Economic and Social Studies
Geographic term:Nigeria
foreign exchange
Abstract:As an alternative to open devaluation, the Nigerian government set up a second-tier foreign exchange market (SFEM) in 1986 with the objective of allowing the market forces of supply and demand to determine the realistic exchange rate of the naira vis--vis foreign currencies. Given the existence of a black market in foreign exchange, the realistic exchange rate is most appropriately defined as that SFEM rate which simultaneously clears the SFEM and eliminates the opportunities for profitable black market transactions. This is the optimal rate to which the official rate should converge. The author derives guidelines for identifying such a 'true' equilibrium exchange rate through the SFEM in a situation in which a black market in foreign exchange operates side by side with the SFEM. Given that the 'true' equilibrium exchange rate is not known, a policy of setting the SFEM rate equal to the equilibrium black market rate is the only efficient way of finding the 'true' equilibrium rate. Bibliogr., notes.