Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela
August 3, 2016
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Summary
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.
Subject: Economic sectors, Exchange rates, Foreign exchange, Imports, Inflation, Informal economy, International trade, Prices
Keywords: aggregate demand, arbitrage firm, black market, cash in advance constraint, central bank, consumption goods, excess demand, exchange rate, Exchange rates, export receipt, fiscal dominance, foreign exchange rationing, Global, goods importer, goods market, Imports, inflation, Informal economy, money supply, nominal exchange rate, oil revenue, price level, regime lead, representative import firm, repressed goods market, scarcity, Venezuela, WP
Pages:
52
Volume:
2016
DOI:
Issue:
159
Series:
Working Paper No. 2016/159
Stock No:
WPIEA2016159
ISBN:
9781475523201
ISSN:
1018-5941
