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How can a strong currency or drop in oil prices raise inflation and the black-market premium?

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  • Cerra, Valerie

Abstract

Based on the case of Venezuela, an oil exporter with a multiple exchange rate regime, this paper explains two counterintuitive phenomena. First, a fall in oil revenue can drive a steep rise in inflation by reducing foreign exchange for imports and raising the fiscal deficit financed by money growth. Second, when foreign exchange is rationed, a devaluation of the official exchange rate could produce a transitory fall in inflation by reducing the fiscal deficit and subsidies for buying foreign exchange. The paper also shows that the black market exchange rate can be rising far faster than overall inflation if it is driven by prices in the most distorted goods markets. The channels emphasized in this paper for determining inflation and the black market exchange rate are novel in the literature and may provide avenues of future research on commodity exporters and foreign exchange constraints.

Suggested Citation

  • Cerra, Valerie, 2019. "How can a strong currency or drop in oil prices raise inflation and the black-market premium?," Economic Modelling, Elsevier, vol. 76(C), pages 1-13.
    • Handle: RePEc:eee:ecmode:v:76:y:2019:i:c:p:1-13
    DOI: 10.1016/j.econmod.2017.05.015
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    References listed on IDEAS

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    4. Lizondo, JoseSaul, 1987. "Exchange rate differential and balance of payments under dual exchange markets," Journal of Development Economics, Elsevier, vol. 26(1), pages 37-53, June.
    5. Palma, Pedro A. & Fontiveros, Domingo, 1988. "A comparative sensitivity analysis of the MODVEN VII macroeconomic model for Venezuela," Economic Modelling, Elsevier, vol. 5(4), pages 286-346, October.
    6. Saul Lizondo, Jose, 1987. "Unification of dual exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 57-77, February.
    7. Flood, Robert P., 1978. "Exchange rate expectations in dual exchange markets," Journal of International Economics, Elsevier, vol. 8(1), pages 65-77, February.
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    Citations

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    Cited by:

    1. Aziza Syzdykova & Aktolkin Abubakirova & Lyazzat Kudabayeva & Ardak Zhantayeva & Aizhan Omarova, 2022. "Asymmetric Causality Relationship between Oil Prices and Inflation in BRIC Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 12(3), pages 184-191, May.
    2. Mensi, Walid & Rehman, Mobeen Ur & Hammoudeh, Shawkat & Vo, Xuan Vinh & Kim, Won Joong, 2023. "How macroeconomic factors drive the linkages between inflation and oil markets in global economies? A multiscale analysis," International Economics, Elsevier, vol. 173(C), pages 212-232.
    3. Aviral Kumar Tiwari & Muhammad Tahir Suleman & Subhan Ullah & Muhammad Shahbaz, 2023. "Analyzing the connectedness between crude oil and petroleum products: Evidence from USA," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2278-2347, July.
    4. Aissa Djedaiet & Hicham Ayad, "undated". "The double whammy of COVID-19 and oil price collapse: Spillover effects on inflation and exchange rates," Review of Socio - Economic Perspectives 202206, Reviewsep.
    5. Paulo Ferreira & Éder J. A. L. Pereira & Hernane B. B. Pereira, 2020. "The Exposure of European Union Productive Sectors to Oil Price Changes," Sustainability, MDPI, vol. 12(4), pages 1-16, February.

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    More about this item

    Keywords

    Inflation; Black market exchange rate; Venezuela; Foreign exchange rationing; Oil revenue;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • P4 - Political Economy and Comparative Economic Systems - - Other Economic Systems

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