Macroeconomic Policy Under Currency Inconvertibility
This paper analyzes the macroeconomics of currency inconvertibility, building on the role of relative prices in a portfolio balance model. The relationship between black markets for foreign exchange and smuggling is first analyzed from the perspective of an individual importer. According to the portfolio view, the black market rate behaves like the financial rate in a dual market. The premium of the black marlet rate over the official rate is thus related to the probability of success in smuggling and the tariff. Then the black market is analyzed using a simple three-good,two-asset general equilibrium model. Under the assumption of regressive exchange rate expectations, the portfolio view is contrasted with a monetary approach to the black market. The short-run and long-run effects of monetary and exchange rate policies on relative prices are assessed. Different assumptions about expected returns are contrasted, but emphasis is placed on the perfect foresight case. Unless expectations are static, official exchange rate policy has to adjust to the private valuation of foreign exchange, as stressed in the conclusion.
Document Object Identifier (DOI): 10.3386/w1571
Published: Braga de Macedo, Jorge."Macroeconomic Policy Under Currency Incontrovertibility," The Economics of the Caribbean Basin, Michael B. Connolly and John McDermott (eds.) New York: Praeger Publishers, 1985.