Exchange Rate Rules, Black Market Premia and Fiscal Deficits: The Bolivian Hyperinflation

Homi Kharas and Brian Pinto

The Review of Economic Studies, 1989, vol. 56, issue 3, 435-447

Abstract: With dual exchange rates, where a managed official exchange rate co-exists with a floating black market rate, a given budget deficit may be consistent with many different inflation rates rather than two, which is the normal result in closed economy systems. Further, all these inflation equilibria are saddle-point stable. A policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high-inflation, saddle-point stable equilibrium where money inflation elasticity exceeds unity. The analytics are motivated and illustrated by the Bolivian hyperinflation of 1984–1985.

Date: 1989
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