Currency Inconvertibility, Trade Taxes and Smuggling

Jorge Braga de Macedo

No 162, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In the classic analysis of smuggling, importers choose the optimal mix of legal and illegal trade, given trade taxes and the technology of detection. This paper introduces an inconvertible currency into the framework, so that illegal trade is valued at a rate higher than the (fixed) official exchange rate. Sections 1 and 2 show how the smuggling ratio and the domestic price mark-up for the import and export good are simultaneously determined. With balanced legal and illegal trade, changes in the (long-run) black market premium are a weighted average of changes in trade taxes, whereas changes in the smuggling ratios depend on the ratio of trade taxes. Thus, an import tariff and an export subsidy rising at the same rate would keep smuggling ratios constant but would lead to a rising black market premium (sections 3 and 4). In Section 5 we present a model explaining the determination of export and import quantities. The model explains the production of exports and non-traded goods and the consumption of imports and non-traded goods, and assumes that the government confiscates traded goods that are unsuccessfully smuggled. Export production may fall and welfare may rise if trade taxes have a negative effect on the relative price of exports and imports which is stronger than the positive effect on smuggled exports and imports (which is always welfare-reducing). Section 6 introduces a portfolio balance model explaining the short-run behaviour of the black market premium. In this model, rising trade taxes may be associated with a premium which increases even more rapidly if there is unreported capital flight.

Keywords: Black Market Premia; Capital Flight; Currency Inconvertibility; Portfolio Balance Model; Smuggling; Trade Taxes (search for similar items in EconPapers)
Date: 1987-03
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=162 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:162

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=162

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().