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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

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 experienceand 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
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

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 authoritys point of view,
dollarization monetary authorities will phenomenon while
maintaining develops 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-

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.
Mundells 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. Johansens 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

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.

Agnor, 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

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-
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-
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

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 Moroccos
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

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

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

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, 19741987. 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 Grangers 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.