Pinto, Brian. (1989) Black Market Premia, Exchange Rate Unification, and Inflation in

Sub-Saharan Africa. The World Bank Economic Review 3.3: 321-38.

World Bank and International Monetary Fund (IMF) programs favor unification

of official and black market exchange rates on the argument that multiple

exchange rates misallocate resources. This article shows that such policy advice

sometimes overlooks an important consideration: when multiple rates are a means

of taxation, the widened deficit from unification increases inflation. This article

uses the experience of Ghana, Nigeria, and Sierra Leone to illustrate the tradeoff

between the benefits of unification for resource allocation and its costs for

inflation.

Luintel, Kul B. (2000) Real Exchange Rate Behaviour: Evidence from Black

Markets. Journal of Applied Econometrics 15: 161-85.

The behaviour of real exchange rates (relative to the US dollar) is examined using

monthly data obtained from the black markets for foreign exchange of eight Asian

developing countries. The data span is 31 years. The black market real exchange

rates do not show excess volatility during the recent float which is in sharp

contrast to the results reported elsewhere. Unit root tests in heterogeneous panels

and variance ratio tests confirm their stationarity. Thus, we find support for PPP

but not for the 'survivorship" bias (Froot and Rogoff, 1995). There is little

evidence of segmented trends. Issues raised by Rogofl" (1996) — of whether PPP

would hold across countries with diflering growth experience—and Lothian and

Taylor (1996)—of whether the degree of relative price volatility may bias results

in favour of mean reverting real exchange rates — are addressed.

Goldberg, Linda S. (1992) Moscow Black Markets and Official Markets for Foreign

Exchange: How Much Flexibility in Flexible Rates? NBER Working Paper Series 4040

Flexible exchange-rate systems often are not recommended for countries

undergoing economic transition. In late 1989, the former Soviet Union instituted

exchange-rate flexibility on the limited share of enterprise international

transactions channeled through the auction and, later, interbank markets for

foreign-currency trade. This paper details the regulatory evolution of this system

and analyses the impact of announced and implemented policy initiatives on two

sets of flexible exchange rates observed in Moscow: i)the exchange rates on

dollar-ruble trade. We ask whether the flexible-rate system, as implemented, was

associated with the negative or positive features of flexible exchange-rate

systems.

Initially the auction and interbank currency structure was used as a mechanism for

a steady real depreciation of the ruble. Thereafter, the ruble was pegged in real

terms at a level initially equal to the black-market exchange rate. This peg

persisted until the end of 1991, when government central-bank foreign-exchange

reserves were depleted and the crawling peg appears to have been abandoned.

Throughout the sample, patterns in black-market exchange rates contrasted

sharply with those of the auction rates. Black-market rates exhibited greater real

variability and exhibited sharp speculative swings.

Goldberg, Linda S., and Il'dar Karimov. (1997) Black Markets for Currency, Hoarding

Activity and Policy Reforms. Journal of International Economics 42.3-4: 349-69.

In the former Soviet Union and throughout Eastern Europe, black-market

exchange rates and second-economy prices often are interpreted by policy-makers

as indicative of post-reform levels. However, these exchange rates and prices can

provide highly-biased signals for policy setting. These biases are especially

important when exchange rates fixed on the basis of these signals are expected to

play a nominal anchor role during stabilizations. This paper traces the paths and

biases in black-market exchange rates, second-economy prices, hoarding stocks,

and privately-held dollars balances after policy-initiatives or other change in the

economic environment are implemented. The stimuli studied are official

exchange-rate adjustments, price reforms, foreign-aid packages, altered risks of

monetary confiscation or currency reforms, and goods-supply related initiatives.

We provide the conditions under which announcements of reform lead short-run

prices or exchange rates to overshoot or to undershoot their long-run equilibrium

levls.

Culbertson, W. Patton. (1989) Empirical Regularities in Black Markets for

Currency. World Development 17.12

This paper develops a model of the black or parallel market foreign exchange rate.

This rate is seen to depend upon the level of the official rate, the (unobserved)

equilibrium rate, the premium offered for exchange sold through the black

market, and government reserve-level policies. The model is then empirically

estimated for 10 countries over a period from 1957 through 1983. The results

generally support the model specified by theory. Additionally, the paper provides

weak-form tests concerning the efficiency of the black market. The results cannot

reject the hypothesis that the current black market rate incorporates all relevant

historical price information.

Pinto, Brian. (1991) Black Markets for Foreign Exchange, Real Exchange Rates and

Inflation. Journal of International Economics 30.1-2: 121-35.

The black market foreign exchange premium is a tax on exports, creating a

conflict between the financing of government spending and the allocative goal of

stimulating exports. The premium is solved for in a model that includes private

portfolio choice, dual exchange markets and money- financing of the fiscal

deficit. The inflationary implications of switching to floats as a means of unifying

ollicial and black market rates are then analyzed. Inflation could rise substantially

if the lost revenues from exports are replaced with a higher tax on money. The

paper is motivated with examples from Sub-Saharan Africa.

Phylaktis, Kate. (1992) The Black Market for Dollars in Chile. Journal of Development

Economics 37: 155-72.

This study investigates the effect of foreign exchange restrictions on the black

market premium for dollars in Chile over the period 1975-1984. The model

emphasizes the interaction of stock and flow conditions in the black market for

dollars. Our result supports the view that the real exchange rate, the official

depreciation-adjusted interest rate differential, the dollar value of peso assets

valued at the official exchange rate, and foreign exchange restrictions are

important determinants of the black market premium.

Canto, Victor A. (1985) Monetary Policy, ‘Dollarization,’ and Parallel Market Exchange

Rates: The Case of the Dominican Republic. Journal of International Money and

Finance 4: 507-21.

Excessive money creation may give rise to inflation tax revenues and to a

depreciation of the domestic currency. This in turn leads to a shift away from the

domestic currency into a foreign currency (e.g., the US dollar hence the term

‘dollarization’). From the domestic monetary authority’s point of view,

‘dollarization’monetary authorities willphenomenon while

maintainingdevelops and tests a model which analyzes the effects of monetary

policy on dollarization and the ‘parallel’ market exchange rates.

Sheikh, Munir A. (1976) Black Market for Foreign Exchange, Capital Flows and

Smuggling. Journal of Development Economics 3: 9-26.

The paper develops a geometrical model of the working of a black market for

foreign ex- change and considers such questions as: Can the black market

exchange rate be a guiding instrument to exchange control authorities considering

a change in the exchange rate? How does exchange control affect the current and

capital account use of foreign exchange in the presence of a foreign exchange

black market? What are the implications of changes in trade restrictions (such as

import tariffs) for the black market exchange rate, supplies of foreign exchange to

exchange control authorities, and current and capital account use of foreign ex-

change?

Macedo, Jorge Braga De. (1987) Currency Inconvertibility, Trade Taxes and Sumggling.

Journal of Development Economics 27: 109-25.

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 in the framework. So that illegal trade is

valued at a rate higher than the (fixed) official exchange rate. Sections 2 and 3

show how the smuggling ratio and the domestic price markup for the import and

export goods 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 imply a rising black market

premium (sections 4 and 5). To determine the quantity of exports and imports. a

model of the economy is presented in section 6, featuring the production of

exports and non-traded goods and the consumption of imports and non-traded

goods, as well as a government confiscating the amounts of traded goods

unsuccessfully smuggled. Then export production may fall, and welfare may rise.

if trade taxes have a negative effect on the relative price of exports and imports

stronger than the positive effect on smuggled exports and imports, which is

always welfare-reducing. Section 7 introduces the short-run determination of the

black market premium via portfolio balance. In this case, rising trade taxes may

be associated with a premium rising even faster if there is unreported capital flight

and conversely.

Schachmurove, Yochanan. (1999) The Premium in Black Foreign Exchange Markets:

Evidence from Developing Economies. Journal of Policy Modeling 21.1: 1-39.

This paper examines the determinants of the premia between the black and

official exchange rates using monthly data for 17 developing countries. The

premium is hypothesized to be positively influenced by the official depreciation-

adjusted interest rate differential and dollar value of domestic assets. It is

hypothesized to be negatively influenced by the official real exchange rate,

exports, and a seasonal factor associated with tourism. The countries studied are:

Bangladesh, Brazil, Fiji, Gambia, Ghana, Guyana, Hungary, Ireland, Jamaica,

Kenya, Nepal, Nigeria, Philippines, Somalia, South Africa, Uganda, and the

former Yugoslavia. In general, the results are very supportive of the model. It is

found that the interest rate differential and assets positively influence the

premium, as is expected. The official real exchange rate is found to negatively

influence the premium.

Bahmanioskooee, M., and A. Tanku. (2006) Black Market Exchange Rate, Currency

Substitution and the Demand for Money in LDCs. Economic Systems 30.3: 249-63.

Mundell’s conjecture in 1963 that the demand for money could depend on the

exchange rate in addition to income and interest rate has received some attention

in the literature by including the official exchange rate and estimating the money

demand in a few developed countries. In less developed countries, since there is a

black market for foreign exchange, it has been suggested that the black market

exchange rate rather than the official rate should be the determinant of the

demand for money in LDCs. This proposition is tested by estimating the demand

for money for 25 LDCs using the bounds testing approach to cointegration. The

main conclusion is that while in some LDCs, the black market rate enters into the

formulation of the demand for money, in some others the official rate is the

determinant. The black market premium also played a role in some countries.

Diamandis, P. (2003) Market Efficiency, Purchasing Power Parity, and the Official and

Parallel Markets for Foreign Currency in Latin America. International Review of

Economics & Finance 12.1: 89-110.

This paper examines the purchasing power parity (PPP) theory from a long-run

perspective in the presence of a parallel or ‘black’ market for U.S. dollars in four

Latin American countries, namely Argentina, Brazil, Chile, and Mexico, using

monthly data for the recent float. Johansen’s full information maximum

likelihood multivariate cointegration technique is applied. Recent developments

associated with this procedure are considered. First, a formal test developed by

Johansen [Econometric Theory 8 (1992) 188, Econometric Theory 11 (1995) 25,

Scand. J. Stat. 24 (1997) 433] for the presence of I(2) and I(1) components in a

multivariate context is applied along with the estimation of the roots of the

companion matrix for the correct determination of the cointegration rank. Second,

given that two significant cointegration vectors were found for any country,

structural restrictions identifying the long- run relations of interest are specified as

proposed by Johansen and Juselius [J. Econometrics 63 (1994) 7] and Johansen [J.

Econometrics 69 (1995) 111]. Thus, the joint structure of PPP and long-run

informational market efficiency could not be rejected for all countries.

Furthermore, estimation of the error correction terms shows that the black market

rate adjusts to eliminate any deviation from long-run PPP. Finally, stability tests

proposed by Hansen and Johansen [Hansen, H., & Johansen, S. (1993). Recursive

estimation in cointegrated VAR-models. Working Paper, University of

Copenhagen, Institute of Mathematical Statistics; Econometrics J. 2 (1999) 306]

are applied and it is shown that the dimensionof the cointegration space is sample

dependent while the estimated coefficients do not exhibit instability in recursive

estimations.

Kharas, Homi, and Brain Pinto. (1989) Exchange Rate Rules, Black Market Premia and

Fiscal Deficits: The Bolivian Hyperinflation. Review of Economic Studies 56: 435-48.

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.

Agénor, Pierre-Richard. (1991) A Monetary Model of the Parallel Market for

ForeignExchange. Journal of Economic Studies 18.4

The purpose of this article has been to provide econometric evidence on the

relationships between official and parallel exchange rates in developing countries,

using a monetary model with currency substitution features, illegal trade flows,

and forward-looking rational expectations. The estimation results obtained with

quarterly data for a group of 12 countries have suggested that changes in the

official exchange rate and monetary disequilibria are the major determinants of

movements in the parallel exchange rate. Currency substitution effects have been

shown to be statistically significant only for a small group of developing countries

— those with a relatively high per capita income. Moreover, the strict long-run

homogeneity relationship between official and parallel exchange rates has been

shown to hold for only six countries in the sample (Colombia, Malaysia, Mexico,

Morocco, Tunisia and Zambia). This result suggests that a nominal devaluation

may have a permanent effect on the spread, contradicting the prediction of some

currency-substitution models.

Calvo, Guillermo A., and Carlos Alfredo Rodriguez. (1977) A Model of Exchange Rate

Determination under Currency Substitution and Rational Expectations. Journal of

Political Economy 85.3: 617

This paper analyzes a two-sector model of exchange rate determination for a

small open economy with flexible prices. Residents are assumed to hold both

domestic and foreign currency and to have rational expecta- tions. The model

satisfiesthe homogeneity postulate but it is shown that an increase in the rate of

expansion of money supply leads to an instanta- neous deterioration of the

realexchange rate. In the long run, however, the latter moves back to its previous

level.

Montiel, Peter J., and Jonathan D. Ostry. (1994) The Parallel Market Premium: Is It a

Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries? IMF

Staff Papers 41.1

It is often argued that the parallel market premium is a useful indicator of real

exchange rate misalignment in developing countries. The empirical evidence,

however, does not suggest a robust correlation between these two endogenous

variables that is independent of the nature of economic shocks and various

structural relationships in the economy. This paper analyzes the reliability of the

parallel market premium as an indicator of real exchange rate misalignment. It

suggests that one should exercise caution in drawing inferences about the sign and

magnitude of real exchange rate misalignment from the premium.

Thomas, Clive Y. (1989) Foreign Currency Black Markets: Lessons from Guyana. Social

and Economic Studies 38.2

Due to the deliberate non-reporting by economic agents of commercial

transactions, which are often quite illegal and concealed for tax avoidance

purposes, the bulk of the social (Guyanese) product goes unrecorded. This paper

examines one aspect of this phenomenon as it relates to foreign currency

transactions in Guyana. The objective is to contribute to policy in three ways: i)

by suggesting measures of foreign exchange management which would prevent

the implantation of this phenomenon where it is not yet significant; ii) by

providing guidelines for dealing with it where it is already strongly entrenched,

and iii) by indicating the means to prevent its recurrence, after it has been

successfully countered.

Baghestani, Hamid. (1997) Purchasing Power Parity in the Presence of Foreign Exchange

Black Markets: The Case of India. Applied Economics 29.9: 1147-154

The empirical validity of PPP as a long-run constant between India and the US is

examined in the presence of foreign exchange black markets. In a trivariate

model, the official exchange rate is found to be cointegrated with both the price

ratio and the black market exchange rate. Both the official exchange rate and price

ratio respond to correct short-run departures from PPP. Also both the official and

the black market exchange rates respond to correct departures from their own

equilibrium relation. The two sources of endogenity in the official rate follow as

Indian authorities aimed to stabilize domestic prices and reduce uncertainty about

the dollar price of rupees.

Van den Berg, Hendrik and Jayanetti, Sanath C. (1993) A novel test of the monetary

approach using black market exchange rates and the Johansen-Juselius cointegration

Method. Economic Letters 41: 413-418

Cointegration is appropriate for testing long-run exchange rate theories such as

the monetary approach, but the post-1973 floating exchange rate period may be

too short. We confirm the monetary model using longer black market exchange

rate series and the Johansen-Juselius cointegration method.

Sanchez-Fung, Jose R. (1999) Efficiency of the Black Market for Foreign Exchange and PPP: The Case of the Dominican Republic. Applied Economics Letters 6.3: 173-76.

Efficiency of the black market for foreign exchange in a developing country can

be assessed by testing whether that market complies with the ‘relative’ version of

the purchasing power parity hypothesis. This paper applies nonstationary and

cointegration to investigate this hypothesis for the Dominican Republic. Both the

Engle-Granger and Johansen techniques support cointegration, so the black

market for foreign exchange in the Domincan Republic is efficient.

Phillips, Ronnie J. (1988) ‘War news’ and black market exchange rate deviations from

purchasing power parity. Journal of International Economics 25: 373-378.

This study evaluates the impact of ‘war news’ on black market exchange rate

deviations from purchasing power parity (PPP). In wartime Vietnam, the greater

the number and intensity of U.S. troop engagements with the enemy, the greater

the confidence in the South Vietnamese government and its fiat currency. During

the period of heaviest U.S. military operations, from 1967 to mid 1969, about 20 `

25 percent of the value of the piaster on the black market can be attributed to this

confidence factor. The results suggest that where variables to measure the news

are available, short-run deviations from PPP can be readily explained.

Odedokun, M.O. (1996) Monetary Model of Black Market Exchange Rate

Determination: Evidence from African Countries. Journal of Economic Studies 23.4: 31-

49.

The study analyses black exchange rate behaviour in African countries, using a

monetary approach. Quarterly data over the 1980-1991 period, pooled across

18 countries, are employed. After the initial preamble, the monetary model is

presented. The model yields a reduced-form equation for the black market

exchange rate, with monetary expansion, expected inflation rate and interest rate

predicted to depreciate this exchange rate, while real income and foreign price of

imports are predicted to do the reverse. Details about the model specification and

estimation are then discussed, including a description of the long-run and error-

correction specifications and pooling of the quarterly data across the countries.

Gupta, Sanjeev. (1980) An Application of the Monetary Approach to Black Market

Exchange Rates. Weltwirtschaftliches Archiv 116.2: 235-52

The results in the previous section further indicate that the price of gold on the

world market greatly influences the price of one U.S. dollar on the black market.

The rising world price of gold through increased money demand tends to lower

(appreciate) the black market exchange rate. Keeping all this in view, if the legal

import of gold is allowed freely, the resulting loss of foreign exchange may not be

considered "desirable," especially when this foreign exchange is required for other

higher valued alternatives (primarily, for development). But, it is well-known that

smuggling is not always welfare maximizing1 and smuggling of gold coupled

with exchange controls contributes to the emergence of a black market, which

indirectly affects the reserves in the way discussed earlier in the paper. To all this

should then be added the cost of enforcement. Therefore, the "optimum" policy

appears to be to balance the loss of reserves due to legally permitted imports of

gold against the increased flow of reserves which would result from the reduced

size of the black market (and a lower premium on the foreign currencies in this

market

Baliamoune-Lutze, Mina. (2010) Black and official exchange rates in Morocco: an

analysis of their long-run behaviour and short-run dynamics (1974-1992). Applied

Economics, 42: 3481-3490.

Using Vector Error-Correction (VEC) model estimation on monthly data from

Morocco for the period January 1974 to December 1992, this article tests the

hypothesis that there is a long-run stable relationship between the official and the

black-market exchange rates for US dollars. We also examine the short-run

dynamics in the relationship between the two markets. The econometric results

indicate that the two exchange rates are cointegrated. Furthermore, we reject weak

exogeneity in the case of the official exchange rate, but fail to reject it in the case

of the black-market rate. Granger causality tests show that the black-market rate

causes the official exchange rate. The results seem to support the efficiency

hypothesis, suggesting that participants in the black-market are able to anticipate

changes in the official exchange rate. The findings also suggest that Morocco’s

decision (in January 1993) to introduce only current account convertibility and

keep controls on capital accounts was wise.

Caporale, Guglielmo Maria, and Mario Cerrato. (2008) Black Market and Official

Exchange Rates: Long-run Equilibrium and Short-run Dynamics. Review of International

Economics16.3: 401-12.

This paper presents further empirical evidence on the relationship between black

market and official exchange rates in six emerging economies (Iran, India,

Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series

techniques and heterogeneous panel methods to test for the existence of a long-

run relationship between these two types of exchange rates. Second, it tests

formally the validity of the proportionality restriction implying a constant black-

market premium. Third, it also analyses the short-run dynamic responses of both

markets to shocks. Finally, it tries to shed some light on the determinants of the

market premium. Evidence of slow reversion to the long-run equilibrium is found.

Further, it appears that capital controls and expected currency devaluation are the

two main factors affecting the size of the premium and determining the

breakdown in the proportionality relationship.

Culbertson, William Patton. (1975) Purchasing Power Parity And Black-Market

Exchange Rates. Economic Inquiry 13.2: 287-96.

This paper develops a theory of black-market exchange rate determination as

a function of the market-clearing rate, the official rate and changes in official reserve levels. The model is tested for three countries over the period 1952-1971 by using purchasing power parity calculations as approximations of the equilibrium rate. The results indicate that relative rates of inflation are the dominant forces influencing equilibrium exchange rates.

Malone, Samuel W., and Enrique Ter Horst. (2010) The Black Market for Dollars in

Venezuela. Emerging Markets Finance and Trade 46.5: 67-89.

In February 2003, the Venezuelan government imposed a strict capital con- trols

policy to stem the outflow of dollars. We describe the mechanics and structure of

the resulting black market and analyze the comparative performance of alternative

models in explaining and forecasting the black market premium. Robustly

significant determinants of the premium include the lagged premium, the official

real exchange rate, the implied returns from arbitrage, and the oil price. Our

preferred model exhibits outstanding out-of- sample forecasting performance,

with an average prediction error of –0.9 percent, and an error standard deviation

of 7.8 percent, during the ten-month period until July 2009. We provide evidence

that the exogenous change of the black market swap vehicle to government bonds

in 2007 induced a significant shift in the relative importance of the determinants

of the premium, causing shocks to become significantly more persistent, the

coefficient on the implied returns from arbitrage to double, and rendering the

beneficial effect of oil price increases insignificant.

Gramacy, Robert, Samuel W. Malone, and Enrique Ter Horst. "Exchange rate

Fundamentals, Forecasting, and Speculation: Bayesian Models in Black Markets"

(2013) Journal of Applied Econometrics DOI: 10.1002/jae.2314

Although speculative activity is central to black markets for currency, the out-of-

sample performance of structural models in those settings is unknown. We

substantially update the literature on empirical determinants of black market rates

and evaluate the out-of-sample performance of linear models and non-parametric

Bayesian treed Gaussian process (BTGP) models against the random walk

benchmark. Fundamentals-based models outperform the benchmark in out-of-

sample prediction accuracy and trading rule profitability measures given future

values of fundamentals. In simulated real-time trading exercises, however, the

BTGP achieves superior realized profitability, accuracy and market timing, while

linear models do no better than a random walk.

Kitsul, Yuriy, and Jonathan H. Wright. (2013) The Economics of Options-Implied

Inflation Probability Density Functions. NBER Working Paper Series 18195

Recently a market in options based on CPI inflation (inflation caps and floors) has

emerged in the US. This paper uses quotes on these derivatives to construct

probability densities for inflation. We study how these pdfs respond to news

announcements, and find that the implied odds of deflation are sensitive to cer-

tain macroeconomic news releases. We also estimate empirical pricing kernels

using these option prices along with time series models fitted to inflation. The

options-implied densities assign considerably more mass to extreme inflation

outcomes (either deflation or high inflation) than do their time series counter-

parts. This yields a U-shaped empirical pricing kernel, with investors having high

marginal utility in states of the world characterized by either deflation or high

inflation.

Ghura, Dhaneshwar, and Thomas J. Grennes. (1993) The Real Exchange Rate and

Macroeconomic Performance in Sub0Saharan Africa. Journal of Development

Economics 42: 155-74.

Pooled time-series and cross section data for 33 countries in Sub-Saharan Africa

(SSA) confirm the negative relationship between the real exchange rate (RER)

misalignment and economic performance (economic growth, imports, exports,

saving and investment). Macroeconomic instability also slows growth and other

indicators of performance. Higher levels of misalignments are accompanied by

higher levels of macroeconomic instability. Both lower levels of RER

misalignment and instability lead to better economic performance. The Edwards

model of RER determination performs well for the region. Black market premia

tend to show a greater degree of misalignment in RER than alternative measures.

Dornbusch, Rudiger, Daniel V. Dantas, Clarice Pechman, Roberto De Rezende Rocha,

and Demetrio Simoes. (1983) The Black Market for Dollars in Brazil. The Quarterly

Journal of Economics 98.1: 25-40.

The model of the black market for dollars focuses on the interaction of portfolio

decisions relevant to the holding of asset stocks and the determinants of net flows

of dollars associated with tourism and smuggling. A partial-equilibrium model of

the black market shows that the level of the premium is determined by the official

real exchange rate and the official, depreciation-adjusted interest differential, as

well as seasonal factors associated with tourism. Expectations of future exchange

rate changes, under rational expectations, are shown to affect the current level of

the black market premium. The empirical evidence provides ample support for the

role of the key determinants of the premium as well as for an important seasonal

pattern. The magnitude of the seasonal variation is evidence of the imperfect

substitutability between black dollars and cruzeiro assets in portfolios.

Ghei, Nita, and Steven B. Kamin. (1996) The Use of the Parallel Market Rate as a Guide

to Setting the Official Exchange Rate. International Finance Discussion Papers564

This paper addresses the merits of using the parallel exchange rate as a guide to

setting the official exchange rate. Ideally, policy makers would set the exchange

rate at the level that would balance trade and sustainable capital flows – that level

is referred to as the equilibrium exchange rate. In practice, it is difficult to identify

the equilibrium exchange rate. In practice, it is difficult to identify the equilibrium

rate, particularly in countries that have experienced macroeconomic volatility

and/or structural change. In this context, where parallel market for foreign

exchange rate exists, it is natural to consider the parallel rate as a proxy for the

equilibrium exchange rate, since it is set directly by the market. The paper

develops an analytic model to explore the relationship between the parallel

exchange rate and the equilibrium rate. It is determined that only under a fairly

narrow set of circumstances will the parallel rate be set at a level close to the

equilibrium exchange rate. The paper then compares the evolution of official and

parallel exchange rates over time, in a large sample of different countries, to

provide a feel for the applicability of the previously-derived theoretical results.

Agenor, Pierre-Richard. (1992) Parallel Currency Markets in Developing Countries:

Theory, Evidence, and Policy Implications. Essays in International Finance 188

This essay reviews recent theoretical and empirical analyses of parallel currency

markets in developing countries and examines key policy issues related to these

markets. Examining the scope and nature of these markets and highlights the

basic structural characteristics likely to be found in a variety of institutional

settings. Also, this paper discusses the determinants of parallel exchange rates

emphasized by the recent theoretical literatures and considers some policy issues

faced by countries with a sizable parallel currency market. The analysis focuses,

in particular, on the rationale and effectiveness of exchange restrictions, on the

role of nominal devaluations as an instrument to reduce the spread between the

official and parallel rates, and on strategies for unifying official and parallel

markets.

Bahmani-Oskooee, Mohsen, and Gour G. Goswami. (2005) The Impact of Corruption on

the Black Market Premium. Southern Economic Journal 71.3: 483-93.

Recently the impact of institutional factors on macro variables has been gaining

momentum. Researchers have investigated the impact of corruption, law and

order, and bureaucracy on economic growth, inflation, investment, productivity,

and the real exchange rate. In this article, we investigate empirically the impact of

institutional factors on the black market premium. In many developing nations,

because of government restrictions on capital and trade flows, there exists a black

market for foreign exchange. By using data from 60 developing countries over the

1982-1995 period, we show that the black market premium is higher in countries

that are plagued by more corruption. This tinding seems to be insensitive to five

different measures of corruption as well as whether cross-section or panel data are

used.

Sturzenegger, Federico A. "Hyperinflation with Currency Substitution: Introducing an

Indexed Currency." Journal of Money, Credit and Banking 1st ser. 26.3 (1994): 377-95.

This paper challenges this interpretation on both theoretical and empirical

grounds. First, we develop a theoretical model in which the inflation rate is a

bubble on the price level. The basic framework follows previous work by

Sidrauski (1967) on models of money in the utility function and Obstfeld and

Rogoff (1983) for its extension to hyperinflations. We show that if an alternative

monetary asset is introduced, the rate at which inflation accelerates declines.

Although initially the rate of inflation may increase or decrease, depending upon

how strong a decline in monetary balances is induced by the currency substitution

process, the rate of inflation along the hyperinflation path will eventually be

smaller than without currency substitution.

Dawson, John W., Steven W. Millsaps, and Mark C. Strazicich. (2007) Trend Breaks and

Non-stationarity in the Yugoslav Black Market for Dollars, 1974–1987. Applied

Economics 39.1: 43-51.

This paper estimate a model of the black market premium for dollars in

Yugoslavia from 1974 to 1987. Unlike previous applications of the model, our

analysis addresses non-stationarity in the underlying data by allowing for trend

breaks. Endogenous structural break tests indicate the presence of breaks closely

associated with the death of Tito and changes in laws affecting the operation of

the black market. After accounting for these breaks, we find strong support for the

underlying model. In addition, we find evidence consistent with the era of

increased government involvement in the black market leading to greater

volatility of the premium following regime change.

Tripathy, Trilochan. (2008) Commodities Market: A Strategic Direction in India." The

Icfai Journal of Business Strategy 5.1

Price volatility is the feature of the Indian primary commodities market, which

has been proved so irrespective of the commodities and futures trading and ban

periods in India. Further, by using Granger’s causality test, the study inferred that

there is a co-movement of prices between the wholesale wheat market and rice

markets and vice versa at an all India level. The study also brought the evidence

that the wholesale wheat market and black gram markets at an all India level are

highly fragmented and have unilateral feedback between wholesale rice market

and black gram market in India.