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Foreign Exchange Controls, Fiscal and Monetary Policy, and the Black Market Premium

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  • Mohsen Fardmanesh
  • Seymour Douglas

Abstract

This paper examines the relationship between the official and parallel exchange rates, in three Caribbean countries, Guyana, Jamaica and Trinidad, during the 1985-1993 period using cointegration, Granger causality, and reduced form methods. The official and parallel rates are cointegrated in all three countries, but with significant average disparity between them in Guyana and Trinidad, which unlike Jamaica applied infrequent and large adjustments to their official rates. The causation is bi-directional in the case of Jamaica and uni-directional, with changes in the official rate Granger causing changes in the parallel rate, in the cases of Guyana and Trinidad, reflecting the difference in their official exchange rate policies. Our reduced form estimates indicate that exchange controls, expansionary fiscal and monetary policy, and changes of government mostly have the expected positive effect on the black market premium. After past values of the premium, exchange controls exert the strongest impact on the premium.

Suggested Citation

  • Mohsen Fardmanesh & Seymour Douglas, 2003. "Foreign Exchange Controls, Fiscal and Monetary Policy, and the Black Market Premium," Working Papers 876, Economic Growth Center, Yale University.
    • Handle: RePEc:egc:wpaper:876
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    File URL: http://www.econ.yale.edu/growth_pdf/cdp876.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kanas, Angelos & Kouretas, Georgios P., 2007. "Regime dependence between the official and parallel foreign currency markets for US dollars in Greece," Journal of Macroeconomics, Elsevier, vol. 29(2), pages 431-449, June.
    2. Albert Makochekanwa, 2007. "Zimbabwe’s Black Market for Foreign Exchange," Working Papers 200713, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    Foreign Exchange Controls; Black Market Exchange Rate; Black Market Premium; Cointegration; Granger Causality;
    All these keywords.

    JEL classification:

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

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