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Smuggling, non-fundamental uncertainty, and parallel market exchange rate volatility

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  • Richard Clay Barnett

Abstract

We explore a model where smuggling and a parallel currency market arise, owing to government restrictions that prevent agents from legally holding foreign exchange. Despite such restrictions, agents are able to diversify their savings, holding both domestic and parallel foreign cash, basing their portfolio allocation on current and prospective parallel exchange rates. We attribute movements in parallel rates to non-fundamental uncertainty. The model generates equilibria with both positive and negative parallel premia and correlations between illegal trade and the premium. The model has the novel implication that currency speculation drives smuggling, affecting real activities in all sectors of the economy.

Suggested Citation

  • Richard Clay Barnett, 2003. "Smuggling, non-fundamental uncertainty, and parallel market exchange rate volatility," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 701-727, August.
    • Handle: RePEc:cje:issued:v:36:y:2003:i:3:p:701-727
    DOI: 10.1111/1540-5982.t01-2-00009
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    Cited by:

    1. Emmanuel Ekow Asmah & Francis Kwaw Andoh & Edem Titriku, 2020. "Trade misinvoicing effects on tax revenue in sub‐Saharan Africa: The role of tax holidays and regulatory quality," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 91(4), pages 649-672, December.
    2. Farzanegan, Mohammad Reza, 2009. "Illegal trade in the Iranian economy: Evidence from a structural model," European Journal of Political Economy, Elsevier, vol. 25(4), pages 489-507, December.
    3. Dujava, Daniel & Siranova, Maria, 2022. "Is it me or you? A deeper insight into profile of misreporting economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 83(C), pages 10-25.
    4. Patricia Sourdin & Richard Pomfret, 2012. "Trade Facilitation," Books, Edward Elgar Publishing, number 14596, June.

    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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