Zimbabwe’s Black Market for Foreign Exchange

This paper looks into the changes of the black market premium for foreign exchange in Zimbabwe. Generally, the black market for foreign exchange arises as a direct consequence of the adoption of exchange rate controls in many developing economies facing substantial macroeconomic imbalances. Despite its negative impact on Zimbabwe’s economy, this market has not, so far, attracted the attention of researchers. The research attempts to describe the functioning of the black market and find out the determinants of the parallel premium based on a stock-flow model as well as to investigate whether inflation Granger causes the parallel exchange rate. Estimated results reveal that the determinants of the black market premium are international foreign reserves, real exchange rate, lagged values of the black market premium, expected rate of devaluation, money supply and inflation. On the other hand, inflation and black market are found to Granger-cause each other during the period under consideration.Black Market Exchange Rate, Black Market Premium, Foreign Exchange Controls, Cointegration, Granger Causality

Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia

A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.Environmental Economics&Policies,Fiscal&Monetary Policy,Macroeconomic Management,Economic Theory&Research,Economic Stabilization

The Monetary Approach in the Presence of I(2) Components: A Cointegration Analysis of the Official and Black Market for Foreign Currency in Latin America

This paper re-examines the long-run properties of the monetary exchange rate model in the presence of a parallel or black market for U.S. dollars in two Latin American countries under the twin hypotheses that the system contains variables that are I(2) and that a linear trend is required in the cointegrating relations. Using the recent I(2) test by Rahbek et al. (1999) to examine the presence of I(2) and I(1) components in a multivariate context we find that the linear trend hypothesis could not be rejected and we find evidence that the system contains two I(2) variables for each country namely, Chile and Mexico, and this finding is reconfirmed by the estimated roots of the companion matrix (Juselius, 1995). The I(2) component led to the transformation of the estimated model by imposing long-run but not short-run proportionality between domestic and foreign money. Three statistically significant cointegrating vectors were found and, by imposing linear restrictions on each vector as suggested by Johansen and Juselius (1994) and Johansen (1995b), the order and rank conditions for identification are satisfied while the test for overidentifying restrictions was significant for either case. The main findings suggest that we reject the forward-looking version of the monetary model for each country, but the unrestricted monetary model is still a valid framework to explain the long-run movements of the parallel exchange rate in both countries. Furthermore, we test for parameter stability using the tests developed by Hansen and Johansen (1993) and it is shown that the dimension of the cointegration rank is sample dependent while the estimated coeffficients do not exhibit instabilities in recursive estimations.I(2) cointegration, monetary model, parallel foreign exchange market, identification, temporal stabi

Sources of fluctuations in parallel exchange rates and policy reform in Myanmar

Myanmar maintained a multiple exchange rate system, and the parallel market exchange rate was left untamed. In the last two decades, the Myanmar kyat exchange rate of the parallel market has exhibited the sharpest fluctuations among Southeast Asian currencies in real terms. Since the move to a managed float regime in April 2012, the question arises of whether exchange rate policies will be effective in stabilizing the real exchange rate. This paper investigates the sources of fluctuations in the real effective exchange rate using Blanchard and Quah’s (1989) structural vector autoregression model. As nominal shocks can be created by exchange rate policies, a persistent impact of a nominal shock implies more room for exchange rate policies. Decomposition of the fluctuations into nominal and real shocks indicates that the impact of nominal shocks is small and quickly diminishes, implying that complementary sterilization is necessary for effective foreign exchange market interventions

Effects of Some Selected Macro-Economic Indicators on Exchange Rates (1986-2019)

Background: The foreign exchange market plays a significant role in the development of a country and the stability of her currency in recent years. Objectives: This article reports the effect of macro-economic indicators on foreign exchange parallel markets for a period between 1986 – 2019. Methods: The macro-economic indicators used were inflation rate, demand for money, the supply of money, OPEC crude oil and the real GDP growth with the dependency of the foreign exchange market. The data for this project was extracted from the publication of the Statistics Unit of the Central Bank of Nigeria in recent years. Multiple Linear Regression was used with special attention on Multicollinearity, Serial Correlation and Heteroscedasticity. The coefficient of determination value of 0.740 shows that the demand for money, the supply of money, OPEC crude oil and the real GDP growth accounted for over 74 percent of the variation in the exchange rate in Nigeria between the years 1986 and 2019. Results: It was discovered from the findings that, money supply into the circulation determines the foreign exchange rate. And it was also discovered that the money supply has a high dependency ratio on the exchange rate among other macro-economic indicators. Thus, the reduced model is a result of the insignificancy of other variables while only variable two (supply of money) is significant. Conclusions: The use of a flexible exchange rate had eliminated the over-valuation of the naira. The parallel market premium has also been narrowed from 600 percent in 1986 to about 11.0 percent in 2018. These were attributed to the weak and import-dependent production structure of the economy. The suggested solution was articulated towards increasing foreign exchange inflows, reducing demand, as well as reforming the foreign exchange market to evolve a more realistic exchange rate for the naira.  Keywords: Multiple Linear Regression, Macro-Economic Indicators, Exchange Rate, Multicollinearity, Serial Correlation and Heteroscedasticit

The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania

Parallel exchange-rate markets have often been dismissed by authorities as a nuisance or as the domain of a small group of economic saboteurs. Using Tanzania as a case study, the authors argue instead that these markets played a central macroeconomicrole in the 1970s and 1980s. They provide a rigorous macroeconomic analysis of the parallel foreign-exchange market and its fiscal implications. First, they investigate the evolution of that market in Tanzania from the mid-1960s to 1990. That period stretched from the adoption of exchange controls to macroeconomic collapse and then to subsequent reforms in the mid- to late 1980s. A reduced -form econometric equation (of a Dornbusch stock-flow model type) indicates that both trade and financial portfolio factors were important in determining the parallel premium, with trade determinants the parallel premium, with trade determinants dominating in the long run, as theory suggests. Then they investigate the fiscal impact of the parallel exchange-rate premium, an issue emphasized in the literature on exchange-rate unification. They construct a counterfactual simulation of fiscal and balance-of-payments flows under alternative assumptions about the indexing of those flows to the parallel and official exchange rate. They find that a more aggressive move toward exchange-rate unification would have already delivered a fiscal bonus by the mid-1980s. Accordingly, unification of the exchange rate would have reduced monetary growth and inflationary pressures. So, contrary to conventional advice often given in Africa and elsewhere, the case of Tanzania suggests that from a fiscal viewpoint there was no economic rationale for gradualism in exchange-rate unification and delay of a move toward convertibility.Economic Theory&Research,Banks&Banking Reform,Fiscal&Monetary Policy,Payment Systems&Infrastructure,Environmental Economics&Policies,Economic Theory&Research,Macroeconomic Management,Fiscal&Monetary Policy,Environmental Economics&Policies,Economic Stabilization

Macroeconomic management and the black market for foreign exchange in Sudan

The author uses a simple general equilibrium model to derive a forward-looking linear solution for the premium on the black market for foreign exchange in Sudan. His solution accounts for the long-run fundamentals of the premium that operate through the current account balance. It also accounts for the short-run determinants of the asset market. Estimates based on Sudanese data broadly corroborate the model's predictions. The author's thesis is that successful exchange rate unification and subsequent integration of the parallel market into Sudan's regular economy will require deep fiscal reform and liberalization of trade and exchange rate policies tailored to the pace of macroeconomic reform. His results show that controlling inflation becomes more difficult under high-premium regimes and that higher premiums hurt official exports and tax revenue from foreign trade. A high premium also tends to accelerate capital flight.Economic Stabilization,Economic Theory&Research,Macroeconomic Management,Achieving Shared Growth,Foreign Trade Promotion and Regulation

Modeling inflation dynamics in a conflict economy

Research Problem: The primary purpose of the paper is to set up a macroeconomic model that depict domestic inflation dynamics in a conflict economy impeded by parallel market for foreign exchange and internal political conflict. Research methodology: To investigate domestic inflation sensitivity to macro variables time-varying coefficient estimation approach employed on monthly data from Sudan during the period from January 2008 to December2013. Results: While domestic money growth (government spending) is the main driver of domestic inflation,the increasing role of parallel market for foreign exchange and imported inflation on domestic inflation reveal increasing sensitivity of the economy to external shocks. Also indicated that our model based estimates of domestic inflation rate is about 22% above the officially announced inflation rate. Recommendations: To control domestic inflation it is essential to control growth in domestic money creation and adopt more flexible official foreign exchange rate that enables inflation trageting policy

Modeling inflation dynamics in a conflict economy

Research Problem: The primary purpose of the paper is to set up a macroeconomic model that depict domestic inflation dynamics in a conflict economy impeded by parallel market for foreign exchange and internal political conflict. Research methodology: To investigate domestic inflation sensitivity to macro variables time-varying coefficient estimation approach employed on monthly data from Sudan during the period from January 2008 to December2013. Results: While domestic money growth (government spending) is the main driver of domestic inflation,the increasing role of parallel market for foreign exchange and imported inflation on domestic inflation reveal increasing sensitivity of the economy to external shocks. Also indicated that our model based estimates of domestic inflation rate is about 22% above the officially announced inflation rate. Recommendations: To control domestic inflation it is essential to control growth in domestic money creation and adopt more flexible official foreign exchange rate that enables inflation trageting policy

Exchange Rate Volatility and the extent of Currency Substitution in Nigeria

This study tests for the existence of currency substitution and attempts to gauge its magnitude in Nigeria. The analysis was based on a multi-perspective unrestricted portfolio balance model. The stock of foreign currency deposits in Nigeria and the ratio of deposits denominated in foreign currency in the domestic banking system to deposits denominated in the domestic currency were modelled. First, the study revealed the presence of currency substitution in the domestic banking system in Nigeria. A major factor driving this process was exchange rate volatility especially real parallel market exchange rate volatility. Also, the study demonstrates that currency substitution in Nigeria was low during the period under review and as such classified Nigeria as moderately dollarized economy. Subsequently, alternative policy options for curtailing currency substitution in Nigeria were explored. The study concludes that currency substitution is an element of Nigerians’ behaviour concerning wealth allocation and as such macroeconomic policies that ensure long periods of low inflation and exchange rate stability become the most powerful policy option that could help stabilize or reduce currency substitution. Also very paramount are the development of domestic financial markets with relevant infrastructural facilities and the development of new financial instruments, which will serve as alternatives to holding money in the domestic economy.Demand for money, Exchange Rate Volatility, Currency Substitution, Macroeconomic Aspects of International Trade and Finance, Nigeria