Smuggler's Blues at the Central Bank: Lessons from Sudan

43 Pages Posted: 24 Jul 2007 Last revised: 28 Jul 2010

See all articles by William H. Branson

William H. Branson

Princeton University - Woodrow Wilson School of Public and International Affairs; National Bureau of Economic Research (NBER)

Jorge Braga de Macedo

New University of Lisbon - Faculty of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 1987

Abstract

The ineffectiveness of real devaluation as stabilization policy does not imply that the nominal exchange rate should be held constant in the face of a domestic inflation. In this circumstance, import duties and export subsidies would have to be escalated to counter the potential erosion of the trade balance. This escalation of trade barriers generates a rising black market premium and offers increasing incentives to smuggling, already a pervasive problem in the African countries. As a consequence, the central bank would find it more and more difficult to hold the nominal exchange rate constant. This leads us to consider a passive exchange rate policy of stabilizing the exchange rate by moving the nominal rate in line with domestic inflation. If such passive policy is not accompanied by the elimination of trade barriers, however, the black market premium will not disappear. Unless exchange rate policy and trade policy are consistent with each other, the smuggler's blues will reach the central bank. Indeed, this is not just a theoretical possibility, it is the major lesson from the recent experience of Sudan.

Suggested Citation

Branson, William H. and Braga de Macedo, Jorge, Smuggler's Blues at the Central Bank: Lessons from Sudan (April 1987). NBER Working Paper No. w2220. Available at SSRN: https://ssrn.com/abstract=347010

William H. Branson (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

409 Robertson Hall
Princeton, NJ 08544-1021
United States
609-258-4828 (Phone)
609-258-5533 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jorge Braga de Macedo

New University of Lisbon - Faculty of Economics ( email )

Campus de Campolide
Lisboa, 1099-032
Portugal

HOME PAGE: http://www.fe.unl.pt/~jbmacedo/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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