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

  • Pinto, Brian
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    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.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 84.

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    Date of creation: 30 Sep 1988
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    Handle: RePEc:wbk:wbrwps:84
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    1. International Monetary Fund, 1985. "Formulation of Exchange Rate Policies in Adjustment Programs," IMF Occasional Papers 36, International Monetary Fund.
    2. Rudiger Dornbusch, 1985. "Special Exchange Rates for Capital Account Transactions," NBER Working Papers 1659, National Bureau of Economic Research, Inc.
    3. Joshua Aizenman, 1985. "On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax," NBER Working Papers 1583, National Bureau of Economic Research, Inc.
    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. 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.
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