Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela

Valerie Cerra

No 2016/159, IMF Working Papers from International Monetary Fund

Abstract: This paper presents a stylized general equilibrium model of the Venezuelan economy. The model explains how the recent sharp fall in oil revenue combines with foreign exchange rationing to produce a steep rise in inflation. Counterintuitively, a devaluation of the official exchange rate could temporarily reduce inflation. The model also explains how the hyper-depreciation of the black market exchange rate reflects prices in the most distorted goods markets.

Keywords: WP; exchange rate; central bank; money supply; inflation; black market; Venezuela; foreign exchange rationing; scarcity; cash in advance constraint; oil revenue; fiscal dominance; aggregate demand; consumption goods; excess demand; representative import firm; goods market; nominal exchange rate; arbitrage firm; price level; repressed goods market; goods importer; export receipt; regime lead; Informal economy; Imports; Exchange rates; Global (search for similar items in EconPapers)
Pages: 52
Date: 2016-08-03
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Citations: View citations in EconPapers (5)

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