Venezuela Bolivar Essay

6873 words - 27 pages

1THE BLACK MARKET FOR DOLLARS IN VENEZUELASAMUEL MALONE AND ENRIQUE TER HORSTAbstract. In February 2003, the Venezuelan government imposed a strict capital controlpolicy to stem the out°ow of dollars. We describe the mechanics and structure of the result-ing black market for foreign exchange, present a theoretical model in the stock-°ow traditionof Dornbusch et al. (1983), and evaluate the performance of our model against past modelsfrom the literature. Our model of the Venezuelan black market premium is parsimoniousbut achieves the lowest RMSE. We ¯nd a signi¯cant role for the lagged premium, the rateof depreciation of the black market rate, and changes in foreign reserves.1. IntroductionIn February of 2003, following the paro petrolero, or \oil strike", that temporarily paralyzedeconomic activity in the country, the Venezuelan government decided to impose a strictcapital control policy to stem the out°ow of US dollars. This policy led naturally to thecreation of a black market for dollars. From that point onward, consumers and importersof foreign goods have had to apply to the state bureaucracy, known as CADIVI for itsacronym in Spanish, for the dollars that are rationed at the o±cial exchange rate from thegovernment's supply of foreign reserves. The surplus demand for dollars is met by the blackmarket, and the black market premium on dollars has been positive, sometimes well above100%, since the beginning of the capital control policy.The recent experience with a black market for foreign currency in Venezuela is not the¯rst for the country. Capital controls have been particularly tempting for policymakersduring past periods of falling international reserves, such as 1960-1964, and later duringthe period 1983-1988, following the collapse of the international price of oil in the early1980s. In earlier work, Hausmann (1992) discusses past experiences with ¯xed and °oatingexchange rate regimes in Venezuela, and presents several macroeconomic models to analyzethe adjustment of the economy to external shocks. The recent imposition of capital controlsin the country in 2003 occurred immediately following a macroeconomic collapse whoseorigins were substantially tied to internal political unrest, although the timing of the oilstrike during a period of low to moderate oil prices most likely made the specter of capital°ight more sinister.1Samuel Malone is a professor of ¯nance in the business school at the Universidad de los Andes in Bogot¶a,Colombia, Calle 21, No. 1-20-piso 9, samuel.malone@gmail.com. Enrique ter Horst is a professor of ¯nanceat the IESA in Caracas, Venezuela, enriqueterhorst@gmail.com.Key words and phrases. Black market; exchange rates; Venezuela; capital controls.We would like to thank Gustavo Garc¶³a, Jos¶e Manuel Puente, Urbi Garay, and Raul Gallegos for commentsand advice on this manuscript.12 SAMUEL MALONE AND ENRIQUE TER HORSTIn the spirit of Hausmann and...

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