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Black markets for foreign exchange, real exchange rates, and inflation : overnight versus gradual reform in sub-Saharan Africa

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  • Pinto, Brian

Abstract

The black market foreign exchange premium is an important implicit tax on exports, creating a conflict between the fiscal goal of financing government spending with a limited menu of tax instruments and the allocative goal of stimulating exports. In this paper, the premium is solved for in a model that includes the portfolio balance approach to exchange rates, dual exchange markets, and seignorage for financing the fiscal deficit. The steady state and dynamic implications for inflation of floats as a vehicle for unifying official and black market rates are then analyzed. Inflation could rise substantially in the new steady state as the lost revenue from exports is replaced with a higher tax on money. Further, the conditions under which undershooting or overshooting occur are parameterized. The paper is motivated by and illustrated with recent examples from sub - Saharan Africa.

Suggested Citation

  • Pinto, Brian, 1988. "Black markets for foreign exchange, real exchange rates, and inflation : overnight versus gradual reform in sub-Saharan Africa," Policy Research Working Paper Series 84, The World Bank.
  • Handle: RePEc:wbk:wbrwps:84
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    References listed on IDEAS

    as
    1. Joshua Aizenman, 1986. "On the Complementarity of Commercial Policy, Capital Controls, and Inflation Tax," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 114-133, February.
    2. Dornbusch, Rudiger, 1986. "Special Exchange Rates for Capital Account Transactions," World Bank Economic Review, World Bank Group, vol. 1(1), pages 3-33, September.
    3. Lizondo, JoseSaul, 1987. "Exchange rate differential and balance of payments under dual exchange markets," Journal of Development Economics, Elsevier, vol. 26(1), pages 37-53, June.
    4. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    5. International Monetary Fund, 1985. "Formulation of Exchange Rate Policies in Adjustment Programs," IMF Occasional Papers 36, International Monetary Fund.
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    Cited by:

    1. Ebaidalla Mahjoub Ebaidalla, 2017. "Determinants and Macroeconomic Impact of Parallel Market For Foreign Exchange in Sudan," Working Papers 1155, Economic Research Forum, revised 11 2017.
    2. Hassan, Rashid M., 1989. "A temporary general equilibrium model with endogenous money for economic policy analysis in Sudan," ISU General Staff Papers 1989010108000010129, Iowa State University, Department of Economics.

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