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Do reductions in black market exchange rate premia cause inflation?

Author

Listed:
  • Bruno Larue

    (CRÉA and Department of Agricultural Economics, Laval University, Ste-Foy, Qc, Canada, G1K 7P4)

  • Jean-Philippe Gervais

    (CRÉA and Department of Agricultural Economics, Laval University, Ste-Foy, Qc, Canada, G1K 7P4.)

Abstract

Unification of the black and official exchange rates and increasing the rate of crawl of the official rate are the competing prescriptions to reduce inefficiencies caused by the black market premia. Pinto (1991) showed that the removal of implicit export taxes could force governments to raise inflation to finance their budget deficit. Park (1995) and Morris (1995) demonstrated that unification need not raise the steady-state level of inflation. In this paper, we investigate the inflation-black market exchange rate premium relationship using time series techniques for Argentina, Peru and Zambia. The empirical evidence from Argentina and Peru tends to support Park and Morris' post-unification low inflation scenario. In contrast, the generalized impulse response functions derived from Zambia's cointegrating VAR support Pinto's result since a temporary positive shock to the black market premium cause a permanent reduction in inflation. However, stability tests suggest that the relationships embodied in the cointegrated system of Zambia are unstable.

Suggested Citation

  • Bruno Larue & Jean-Philippe Gervais, 2001. "Do reductions in black market exchange rate premia cause inflation?," Empirical Economics, Springer, vol. 26(3), pages 525-551.
    • Handle: RePEc:spr:empeco:v:26:y:2001:i:3:p:525-551
    Note: received: January 2000/Final version received: August 2000
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    Citations

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    Cited by:

    1. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, vol. 21(2), pages 238-259, June.
    2. Panayiotis Diamandis & Georgios Kouretas & Leonidas Zarangas, 2005. "Expectations and the black market premium for foreign currency in Greece," Applied Financial Economics, Taylor & Francis Journals, vol. 15(10), pages 667-677.
    3. Diamandis, Panayiotis F. & Drakos, Anastassios A., 2005. "Long-run dynamics of official and black-market exchange rates in Latin America," Global Finance Journal, Elsevier, vol. 15(3), pages 219-237, February.
    4. Onour, Ibrahim, 2020. "Modeling the impact of economic sanctions on a small open economy: A dynamic approach," MPRA Paper 116005, University Library of Munich, Germany.

    More about this item

    Keywords

    Black market exchange rates · Inflation · Cointegration · Stability tests;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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