Skip to main content
Article
Do Reductions in the Black Market Exchange Rate Premia Cause Inflation?
Empirical Economics (2001)
  • Jean-Philippe Gervais, Laval University
  • Bruno Larue
Abstract

Unification of the black and official exchange rates and increasing the rate of crawl of the official rate are the competing prescriptions to reduce inefficiencies caused by the black market premia. Pinto (1991) showed that the removal of implicit export taxes could force governments to raise inflation to finance their budget deficit. Park (1995) and Morris (1995) demonstrated that unification need not raise the steady-state level of inflation. In this paper, we investigate the inflation-black market exchange rate premium relationship using time series techniques Argentina, Peru and Zambia. The empirical evidence from Argentina and Peru tends to support Park and Morris’ post-unification low inflation scenario. In contrast, the generalized impulse response functions derived from Zambia’s cointegrating VAR support Pinto’s result since a temporary positive shock to the black market premium cause a permanent reduction in inflation. However, stability tests suggest that the relationships embodied in the cointegrated system of Zambia are unstable.

Keywords
  • Black market exchange rates,
  • Inflation,
  • Cointegration,
  • Stability tests
Disciplines
Publication Date
August, 2001
Citation Information
Jean-Philippe Gervais and Bruno Larue. "Do Reductions in the Black Market Exchange Rate Premia Cause Inflation?" Empirical Economics Vol. 26 Iss. 3 (2001)
Available at: http://works.bepress.com/jp_gervais/12/