Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela
IMF Working Papers, August 3, 2016
Source details
- Canonical URL
- Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela
Other formats
Bibliographic details
- Authors: Valerie Cerra
- Published: August 3, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475523201.001
Model overview
- Presents a stylized general equilibrium model of the Venezuelan economy.
- Incorporates a sharp fall in oil revenue and foreign exchange rationing.
- Features modeling elements listed in keywords: aggregate demand, arbitrage firm, black market, cash in advance constraint, central bank, consumption goods, excess demand, exchange rate, export receipt, fiscal dominance, foreign exchange rationing, goods importer, goods market, Imports, money supply, nominal exchange rate, oil revenue, price level, representative import firm, repressed goods market, scarcity.
Key findings
- 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 explains how the hyper-depreciation of the black market exchange rate reflects prices in the most distorted goods markets.
Mechanisms and channels
- Oil revenue shock reduces foreign exchange availability.
- Foreign exchange rationing limits importers’ ability to obtain goods at the official rate, creating distortions across goods markets.
- Distorted goods markets and scarcity feed into higher domestic price levels, producing steep inflation.
- Black market exchange rate hyper-depreciation emerges as prices in the most distorted goods markets are arbitraged through informal channels.
Policy implications and interpretations
- Official exchange rate devaluation may have short-term disinflationary effects in the presence of foreign exchange rationing, according to the model’s dynamics.
- Addressing foreign exchange rationing and the distortions in goods markets is central to mitigating inflationary pressures generated by oil revenue shocks.
Content in this bundle
- Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela