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Economic Research Institute Study paper


Utah State University

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The existence of black market exchange rates of developing countries is common knowledge. and the Indian rupee has been traded in an unofficial "free" market for along time (Pick 1975. p. 239). The emergence of the commodities black market in general and the currency black market in particular is the outcome of official control on the free market operation. In the case of the exchange rate, an additional factor is important--a government's perception of the currency's prestige. For example, the political stability of many governments in the developing countries is often at stake when the government decides to devalue currency, even when such a decision is economically sound. the possible political opposition explains partly why most developing countries opt for a fixed exchange rate regime and sticks to the overvalued exchange rate. One strong opinion in favor of a fixed exchange rate is the following: the developing countries cannot follow an independent course in today's world regarding the exchange rate of their currencies. Either they peg their currencies to major world currencies, in which case it is a free floating exchange rate as the base currency floats, or they fix the exchange rate of their currencies vis-a-vis a basket of currencies, in which case it constitutes a managed float. What the developing countries fear most is the speculation with the exchange rate of their currencies. In this case, the country loses valuable foreign exchange.