Contractionary devaluation with black markets for foreign exchange
AbstractAnalyses of the possible contractionary effects of exchange rate devaluation typically assume the foreign exchange market to be unified, thereby ignoring the large fraction of transactions taking place in the black market for foreign exchange that exist in many developing countries. This paper explores how the existence of these black markets may alter the impact of an official devaluation on aggregate output. It is argued that devaluations will be followed by less immediate contraction in a blackmarket economy than in a unified-market economy, both because the black market exchange rate will depreciate by less than the official rate, and because many of the devaluation's contractionary effects will occur in anticipation of the official devaluation itself. These propositions are tested using a simple numerical simulation model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 370.
Date of creation: 1990
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven B. Kamin, 1988. "Devaluation, exchange controls, and black markets for foreign exchange in developing countries," International Finance Discussion Papers 334, Board of Governors of the Federal Reserve System (U.S.).
- P. Krugman & L. Taylor, 1976.
"Contractionary Effects of Devaluations,"
191, Massachusetts Institute of Technology (MIT), Department of Economics.
- Hanson, James A., 1983. "Contractionary devaluation, substitution in production and consumption, and the role of the labor market," Journal of International Economics, Elsevier, vol. 14(1-2), pages 179-189, February.
- Dornbusch, Rudiger, et al, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 25-40, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.