Exchange Control, Black Market for Foreign Exchange, and Employment in a Model with a Nontraded Good

Rajat Acharyya

Review of Development Economics, 1998, vol. 2, issue 3, 305-317

Abstract: This paper examines the employment effect of devaluation in a model with a nontraded good and a black market for foreign exchange. The disaggregative approach reveals, in contrast to an earlier one‐sector analysis, that overall employment may change even if the exchange control is such that aggregate output remains the same following devaluation. But in such a situation, depending on the state of the market, the change in nontradables demand due to a change in the black market exchange rate constitutes the major source of a contractionary effect, and that too happens when, most desirably, the black market rate appreciates.

Date: 1998
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