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Macroeconomic Policy Under Currency Inconvertibility


  • Jorge Braga de Macedo


This paper analyzes the macroeconomics of currency inconvertibility, building on the role of relative prices in a portfolio balance model. The relationship between black markets for foreign exchange and smuggling is first analyzed from the perspective of an individual importer. According to the portfolio view, the black market rate behaves like the financial rate in a dual market. The premium of the black marlet rate over the official rate is thus related to the probability of success in smuggling and the tariff. Then the black market is analyzed using a simple three-good,two-asset general equilibrium model. Under the assumption of regressive exchange rate expectations, the portfolio view is contrasted with a monetary approach to the black market. The short-run and long-run effects of monetary and exchange rate policies on relative prices are assessed. Different assumptions about expected returns are contrasted, but emphasis is placed on the perfect foresight case. Unless expectations are static, official exchange rate policy has to adjust to the private valuation of foreign exchange, as stressed in the conclusion.

Suggested Citation

  • Jorge Braga de Macedo, 1985. "Macroeconomic Policy Under Currency Inconvertibility," NBER Working Papers 1571, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1571
    Note: ITI IFM

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    References listed on IDEAS

    1. 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 617-625, June.
    2. Rudiger Dornbusch & Daniel Valente Dantas & Clarice Pechman & Roberto de Rezende Rocha & Demetrio SimÃ…es, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, Oxford University Press, vol. 98(1), pages 25-40.
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    Cited by:

    1. William H. Branson & Jorge Braga de Macedo, 1987. "Smuggler's Blues at the Central Bank: Lessons from Sudan," NBER Working Papers 2220, National Bureau of Economic Research, Inc.
    2. repec:arp:ijefrr:2017:p:76-90 is not listed on IDEAS
    3. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, vol. 21(2), pages 238-259, June.

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