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Foreing exchange shadow prices : a critical review of current theories
This article is a review of currently accepted methods for calculating the shadow price of foreign exchange in developing countries. The authors wrote it in the field after spending some months dredging shadow price formulas from the literature, inventing new ones, rationalizing the whole lot in ter...
This article is a review of currently accepted methods for calculating the shadow price of foreign exchange in developing countries. The authors wrote it in the field after spending some months dredging shadow price formulas from the literature, inventing new ones, rationalizing the whole lot in terms of foreign trade theory, and trying to decide which method was best for the shadow price estimates we were concurrently trying to make. This article presents a report on the theoretical side of this work here mainly in the utilitarian hope that people can save some future would-be shadow pricer all the essentially academic effort they put in, so that they can spend their time on more immediately productive activities. Also, the authors hope to stimulate further research about this important shadow price, so that future calculators can use methods more sophisticated than the ones herein, all of which fail to surpass the limitations of static, classic foreign trade theory. Generalization under dynamic and uncertain conditions and a more explicit treatment of the problems created by quantitative import restrictions and by the government's budget constraint are sorely needed. The authors hope that these improvements will be forthcoming in the near future.