Devaluation, exchange controls, and black markets for foreign exchange in developing countries

Steven B. Kamin

No 334, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper considers how exchange controls, black markets, and forward-looking expectations condition the impact of exchange rate devaluations in developing countries. A model incorporating these features is developed to analyze the response of key external balance indicators to anticipated devaluations. The model is driven by the movements of black market exchange rates in perfect foresight equilibrium, which in turn force changes in export under-invoicing and official trade statistics. The predicted movements in all measurable variables, both before and after devaluation, closely mirror those historically associated with devaluation episodes. The analysis is then extended to the case of 'devaluation cycles' to examine the paths of the black market rate and official trade statistics in the face of persistent inflation which over-values the real exchange rate and motivates periodic devaluations. Statistical analysis of a multi-devaluation data set strongly supports some of the most important predictions of the model: black market exchange rates typically depreciate in response to official devaluation, and all else equal, increases in the black market rate reduce official measures of dollar value exports.

Keywords: Foreign exchange - Law and legislation; Developing countries (search for similar items in EconPapers)
Date: 1988
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:334

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