IDEAS home Printed from
   My bibliography  Save this article

The Black Market Premium and the Rate of Inflation in a Dual Exchange Rate Regime


  • Shi, Jianhuai


This paper examines the relationship between the black market premium and the rate of inflation under a dual exchange rate regime consisting of an official market and a black market. By explicitly specifying the implicit export tax associated with the government budget constraint in a dynamic optimizing context, the paper demonstrates that (1) for any given long-run rate of inflation, there exist two steady-state equilibria corresponding to a high premium and a low premium, and that (2) an increase in the rate of crawl of the official exchange rate has two effects on the premium, namely, the financing effect and the portfolio effect. Therefore, the conventional view that a trade-off exists between the black market premium and the rate of inflation when the inflation elasticity of money demand is less than unity does not generally hold. It is also shown that, although the implicit export tax vanishes when the two exchange rates are unified, the inflation tax may not increase because the unification increases the explicit export tax. This result also differs from the conventional view. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Shi, Jianhuai, 2000. "The Black Market Premium and the Rate of Inflation in a Dual Exchange Rate Regime," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(1), pages 77-88, February.
  • Handle: RePEc:ijf:ijfiec:v:5:y:2000:i:1:p:77-88

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijf:ijfiec:v:5:y:2000:i:1:p:77-88. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.