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Black market premia, exchange rate unification, and inflation in sub-Saharan Africa

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  • Pinto, Brian
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    Abstract

    In countries where the black market premium on foreign exchange is exceptionally high, often more than 100 percent, lowering the black market rate to a level close to the market determined official rate will improve the balance of payments and increase exports. Floating the currency to depreciate the real exchange rate and make exports more competitive can raise inflation substantially, however, as governments replace the lost revenue from exports. Inflation will occur even if real government spending remains constant unless there are new taxes or spending cuts to compensate for the loss of implicit tax revenues. To avoid costly surges in inflation, exchange rate reform may have to proceed slowly, otherwise the depreciation is likely to meet with considerable political and social opposition as inflation rises. Once the government closes the spread between the official and black market rates, it faces a decision on whether to continue with a float permanently. Evidence from developing countries over the next few years should give some insights into this issue.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 37.

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    Date of creation: 31 Jul 1988
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    Handle: RePEc:wbk:wbrwps:37

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    Related research

    Keywords: Economic Stabilization; Environmental Economics&Policies; Markets and Market Access; Access to Markets; Economic Theory&Research;

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    1. 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.
    2. Rudiger Dornbusch, 1985. "Special Exchange Rates for Capital Account Transactions," NBER Working Papers 1659, National Bureau of Economic Research, Inc.
    3. Sebastian Edwards & Sweder van Wijnbergen, 1983. "The Welfare Effects of Trade and Capital Market Liberalization: Consequences of Different Sequencing Scenarios," NBER Working Papers 1245, National Bureau of Economic Research, Inc.
    4. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    5. Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
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    Cited by:
    1. Shah, Anwar & Whalley, John, 1990. "An alternative view of tax incidence analysis for developing countries," Policy Research Working Paper Series 462, The World Bank.
    2. Kemme, David M. & Roy, Saktinil, 2006. "Real exchange rate misalignment: Prelude to crisis?," Economic Systems, Elsevier, vol. 30(3), pages 207-230, October.
    3. Aron, Janine & Elbadawi, Ibrahim A., 1992. "Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia," Policy Research Working Paper Series 909, The World Bank.

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