## Foreign Exchange Queues, Informal Traders, and a Zero Premium in the Black Market: A Cape Verdean Puzzle

_IMF Working Papers, August 1, 1999_

## Source details

**Canonical URL:** [Foreign Exchange Queues, Informal Traders, and a Zero Premium in the Black Market: A Cape Verdean Puzzle](https://www.imf.org/en/publications/wp/issues/2016/12/30/foreign-exchange-queues-informal-traders-and-a-zero-premium-in-the-black-market-a-cape-3252)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/30/foreign-exchange-queues-informal-traders-and-a-zero-premium-in-the-black-market-a-cape-3252/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/30/foreign-exchange-queues-informal-traders-and-a-zero-premium-in-the-black-market-a-cape-3252/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/30/foreign-exchange-queues-informal-traders-and-a-zero-premium-in-the-black-market-a-cape-3252/bundle-manifest.json)

## Bibliographic details
- Authors: Jan-Peter Olters
- Published: August 1, 1999
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451853322.001

---

### Overview and research question
- Author: Jan-Peter Olters
- Date: August 1, 1999
- Publication: IMF Working Papers, Working Paper No. 1999/110, Issue: 110, Volume: 1999, Pages: 31
- DOI: https://doi.org/10.5089/9781451853322.001
- Stock No: WPIEA1101999
- ISBN: 9781451853322
- ISSN: 1018-5941
- Core puzzle: During 1996–98 Cape Verde tolerated a parallel foreign exchange market while street traders demanded only negligible premiums (if any at all) for foreign exchange despite indicators suggesting the exchange rate peg was unsustainable.

### Key findings and conjecture
- Empirical observation:
  - Several indicators during 1996–98 hinted at the apparent unsustainability of Cape Verde’s exchange rate peg.
  - The country faced a considerable backlog of approved but unmet applications for foreign currencies.
  - A parallel (black) market for foreign exchange existed, but street traders demanded only negligible premiums (if any).
- Theoretical conjecture:
  - By integrating emigrants’ transfer decisions into a basic Mundell-Fleming-type model, the author conjectures that the zero (negligible) premium puzzle can be explained by the increasing use of transfer channels outside the banking system.
  - These outside-the-banking-system transfer channels lead to unrecorded inflows of foreign exchange.
- Data analysis:
  - Analysis of the relevant balance of payments data appears to support the result that unrecorded inflows (via informal transfer channels) can account for the observed zero premium in the black market.

### Analytical framework
- Model used:
  - Basic Mundell-Fleming-type open economy model augmented to incorporate emigrants’ transfer decisions.
- Mechanism emphasized:
  - Shift of remittance and transfer flows from recorded (banking) channels to informal/unrecorded channels reduces visible foreign exchange scarcity, thereby suppressing black market premiums despite formal shortages and queues.

### Policy-relevant implications
- Recognition of informal transfer channels:
  - Policymakers should account for unrecorded inflows when assessing foreign exchange market pressures and the sustainability of exchange rate regimes.
- Balance of payments monitoring:
  - Traditional balance of payments statistics may understate actual foreign exchange inflows if informal transfer channels grow, affecting policy diagnostics and responses to apparent currency shortages.
- Exchange rate management:
  - Tolerating parallel markets while relying on recorded inflows can mask underlying vulnerabilities; understanding remittance channel composition is important for exchange rate and reserve policy calibration.

### Subjects and keywords (as provided)
- Subjects: Conventional peg, Currencies, Currency markets, Economic sectors, Financial markets, Foreign exchange, Informal economy, International reserves, Money
- Keywords: aggregate demand, balance of payments, black markets, cash transfer, Conventional peg, Currencies, Currency markets, exchange rate, foreign currency, foreign exchange queue, Foreign exchange queues, Informal economy, open economy, unrequited transfers, Western Europe, WP

*Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/foreign-exchange-queues-informal-traders-and-a-zero-premium-in-the-black-market-a-cape-3252*

---

## Content in this bundle

- **_wp99110**
  - [_wp99110 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/1999/_wp99110.pdf.md){rel="alternate" type="text/markdown"}
  - [_wp99110 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/1999/_wp99110.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/foreign-exchange-queues-informal-traders-and-a-zero-premium-in-the-black-market-a-cape-3252_