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The Black Market for Dollars in Venezuela

Listed author(s):
  • Samuel W. Malone
  • Enrique ter Horst

In February 2003, the Venezuelan government imposed a strict capital controls policy to stem the outflow of dollars. We describe the mechanics and structure of the resulting black market and analyze the comparative performance of alternative models in explaining and forecasting the black market premium. Robustly significant determinants of the premium include the lagged premium, the official real exchange rate, the implied returns from arbitrage, and the oil price. Our preferred model exhibits outstanding out-of-sample forecasting performance, with an average prediction error of -0.9 percent, and an error standard deviation of 7.8 percent, during the ten-month period until July 2009. We provide evidence that the exogenous change of the black market swap vehicle to government bonds in 2007 induced a significant shift in the relative importance of the determinants of the premium, causing shocks to become significantly more persistent, the coefficient on the implied returns from arbitrage to double, and rendering the beneficial effect of oil price increases insignificant.

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File URL: http://hdl.handle.net/10.2753/REE1540-496X460505
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Article provided by Taylor & Francis Journals in its journal Emerging Markets Finance and Trade.

Volume (Year): 46 (2010)
Issue (Month): 5 (September)
Pages: 67-89

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Handle: RePEc:taf:emfitr:v:46:y:2010:i:5:p:67-89
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  1. Kiguel, Miguel & O'Connell, Stephen A, 1995. "Parallel Exchange Rates in Developing Countries," World Bank Research Observer, World Bank Group, vol. 10(1), pages 21-52, February.
  2. Goldberg, Linda S. & Karimov, Il'dar, 1997. "Black markets for currency, hoarding activity and policy reforms," Journal of International Economics, Elsevier, vol. 42(3-4), pages 349-369, May.
  3. Rudiger Dornbusch & Daniel Valente Dantas & Clarice Pechman & Roberto de Rezende Rocha & Demetrio SimÅes, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 25-40.
  4. Kamin, Steven B., 1993. "Devaluation, exchange controls, and black markets for foreign exchange in developing countries," Journal of Development Economics, Elsevier, vol. 40(1), pages 151-169, February.
  5. Sims, Christopher A & Uhlig, Harald, 1991. "Understanding Unit Rooters: A Helicopter Tour," Econometrica, Econometric Society, vol. 59(6), pages 1591-1599, November.
  6. Pierre-Richard Agénor & Robert P. Flood, 1992. "Unification of Foreign Exchange Markets," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 923-947, December.
  7. Patton Culbertson, W., 1989. "Empirical regularities in black markets for currency," World Development, Elsevier, vol. 17(12), pages 1907-1919, December.
  8. Fishelson, Gideon, 1988. "The black market for foreign exchange : An international comparison," Economics Letters, Elsevier, vol. 27(1), pages 67-71.
  9. Marion, Nancy P, 1994. "Dual Exchange Rates in Europe and Latin America," World Bank Economic Review, World Bank Group, vol. 8(2), pages 213-245, May.
  10. Shachmurove, Yochanan, 1999. "The Premium in Black Foreign Exchange Markets: Evidence from Developing Economies," Journal of Policy Modeling, Elsevier, vol. 21(1), pages 1-39, January.
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