ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Exchange Rate Policy and Black Market Premium on Foreign Exchange

The precondition for exchange rate policies to reduce under-invoicing of exports is that the black market premium (BMP) on foreign exchange is lowered. The popular conception that this is always the case is not necessarily supported by empirical evidence. This gap between theory and evidence is due to the incomplete theorisation of the link between exchange rate policy and BMP. This paper discusses two additional channels through which BMP is affected. One is the income effect consequent upon employment and real income expansion that raises the black market dollar demand. The other is the variation in export quality that may raise the black market dollar supply. These effects work in opposite directions and together with the usual effects make the change in BMP less certain than predicted in the existing literature.

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