Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela

53 Pages Posted: 9 Dec 2016

See all articles by Valerie Cerra

Valerie Cerra

International Monetary Fund (IMF)

Date Written: August 2016

Abstract

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. Counter intuitively, 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.

Keywords: Inflation, Venezuela, Fiscal policy, Monetary policy, Devaluation, Official exchange market rates, Shadow economy, Consumer goods, General equilibrium models, inflation; black market; exchange rate; Venezuela; foreign exchange rationing;scarcity; cash in advance constraint; oil revenue; fiscal dominance

JEL Classification: F40, E10, P40

Suggested Citation

Cerra, Valerie, Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela (August 2016). IMF Working Paper No. 16/159, Available at SSRN: https://ssrn.com/abstract=2882596

Valerie Cerra (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
United States
202-623-8596 (Phone)

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