CARESS Working Paper 97-03 The Prelniuln in Black Dollar Markets

Dr Yochanan Shaclunurovet

University of Pennsylvania

March 1997

Abstract

This paper examines the effects of various economic factors on the black market exchange rate premium in developing cOlmtries using monthly data from 1985 to 1989 The model analyzes the interaction of stock and flow conditions in determining both the premium on the black dollar and the stock of black money Some of the factors this paper hypothesizes to deshytermine the black market premium is the official real exchange rate the official depreciation-adjusted interest rate differential the level of exports and a seasonal factor associated with tourism

The empirical results tend to agree with the findings of Dornbusch et a1 (QJE February 1983) These results are important because they provide a starting point for governments to control the level of black market activity

1 Introduction

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium This study is targeted at

1 would like to thank Robert Alwine for an excellent research assistance tPlease send all correspondence to Professor Yochanan Shachmurove Department of Ecoshy

nomics University of Pennsylvania 3718 Locust Walk Philadelphia PA 19104-6297 Teleshyphone numbers (215) 898-1090 Fax (215) 573-2057 Home (610) 645-9235 E-mail address yochananeconsasupennedu

the behavior of the black market foreign exchange in developing countries using monthly data from 1985 to 1989 The vast majority of black markets in foreign exchange are in the developing countries The empirical investigation is based on a model developed by Dornbusch Dantas Pechman Rocha and Simoes (1983) The central and most interesting feature of the model is the interaction of stock and flow conditions in determining both the premium on the black dollar and the stock of black money It is proposed that the black market premium is determined by the official real exchange rate the official depreciation-adjusted interest rate differential the level of exports and a seasonal factor associated with tourism These factors are interesting to examine because they may provide a foothold for governments of developing countries in trying to restrict activities in the black market Black money affects public revenues degenerates the investable surplus delimits the national productivity drains the balance of payments and distorts equity and equality concepts of economic distribution

The black market exchange rates in the following seventeen developing counshytries are studied Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireshyland Jamaica Kenya Nepal Nigeria Philippines Somalia South Mrica Uganda and (the former) Yugoslavia

Despite the increasing trend toward globalizing the world economy many deshyveloping countries are still living in a chaotic constellation of limitations and controls over foreign currency holdings and transactions and a wide array of black market of currencies Many developing countries currencies have so called legisshylation for monetary protection usually limiting the amount of foreign exchange an individual is allowed to hold Such currency regulations lead to unofficial parallel or illegal transactions in foreign currencies

A parallel or a black market is an illegal structure that is created in response to government intervention which produces excess supply or demand for a prodshyuct When the price of foreign currency is set below the market clearing rate an excess demand is usually generated for acquiring foreign currency The govshyernment has the choice of either devaluating the currency or maintaining strict controls over exchange such as setting quotas on the purchase of foreign exchange Such currency controls are designed by governments in order to limit the use of foreign exchange in transactions

The United States Dollar used to be the only preferred currency on the black market When the dollar was removed from the gold standard in August 1971 it lost its dominance and other currencies became popular as vehicle currencies in

2

foreign currency black markets throughout the world The increased demand for such monies as the German Mark and the Swiss Franc reduces the premia for the US Dollar Nonetheless the US dollar is still the primary currency traded in most of the globes black markets serving as a pass-through vehicle to precious metals such as gold energy uses such as oil and other monetary units such as the Japanese Yen the German Mark and the Swiss Franc

Only seventeen countries have currencies that are free from internal black market exchange1 Most other currencies have legislation that limits the foreign exchange available which only serves to generate illegal transactions Controls over monetary exchange only increase the risk and encourage evasion The reshystrictions promote the diversion of scarce money from the official channels to be distributed later in the illegal channels As long as the risk is tolerable there are high incentives to sell on the black market to reap the profits The commodity is purchased at a lower price but is then sold illegally at a higher price on the market because of the demand generated from shortages The more inefficient a countrys reserves or financial capacities the greater the likelihood of a vigorously organized black market The stringent regulations or punishments only serve to increase the premium between the black and the official foreign exchange rates If a large proportion of foreign exchange transactions are conducted in this manner the devaluation of official rates can affect consumer prices as well as the entire economy

Legislative controls and rationing that attempt to fight black markets often contribute instead to higher activities in the black market for foreign exchange The enforcement of governmental policies price ceilings and restrictions on forshyeign currency help increase scarcity which in turn encourages accumulation for later illegal transactions Attempts by governments are usually ineffective unless they are also accompanied by increases in productivity price stability and availshyability of goods Without careful monitoring of these actions transactions in the black market are going to persist despite government interventions

The designing of monetary policy in each country depends on the official economy This economy involves open transactions financed through identifishyable sources and generates income within the parameters of government rules and regulations In addition to the official economy many countries particularly developing ones have developed a parallel economy

This parallel economy or black market emerges through the manipulation of the economic forces of supply and demand for both currency and commodities A

3

black market also emerges when trade and industry create an artificial situation of scarcity or glut and in the process amass high returns on their investments by profiteering As a result of profiteering activity the black market generates unreported income and wealth which escape detection by official statistics (Culshybertson 1975 Ray 1981 Nowak 1985 Manasian et al 1987 Roemer and Jones 1991 and Argy 1994)

Gupta (1981) attributes much of the strength of the black market to the resale of officially allocated foreign exchange holdings and to the incentive to undershyinvoice and smuggle exports He argues that an increase in the black market rate given the official exchange rate creates an incentive for residents abroad to channel their remittances through the black market This raises their private receipts in terms of home currency and deprives the central bank of this foreign exchange Economists studying black market activity in developing countries advocate that it is best to keep the black market premium rate as low as possible (Gupta 1981) By influencing the determinants of the black market exchange rate developing counties can keep the black market premium rate low and increase their official foreign exchange currency holdings

The paperis organized as follows Section 2 presents the model for the preshymium on the black dollar Section 3 introduces the data Section 4 details the empirical results Section 5 summarizes

2 The Model

The model is based on that of Dornbusch et aL (1983) The black market is treated in a partial-equilibrium stock and flow framework The interest rate on the home currency the US interest rate the official exchange rate and the domestic currency value of non-dollar assets are taken as given The stock demand for black dollars arises as the result of portfolio diversification and the flow market arises as the result of international trade both reported and unreported

21 The Stock Demand for Black Dollars

The stock demand for black dollars is posited to be positively related to wealth and the official depreciation-adjusted interest rate Equilibrium in the stock market for dollars must meet the condition that supply equal demand Using the notation of Dornbusch et al this relation may be expressed as follows

4

EB = 0 (i +d - i)(A + EB) 0 gt 0(1) (1)

Thus EB represents the supply of black dollars and q is a positive function of o (i + d - i)(A + EB) where E represents the black market exchange rate B the stock of black dollars i the interest rate on US dollars d the rate of depreciation of the home currency in the black market i the interest rate on the home currency A represents the value of non-dollar assets As stated above demand is posited to be positively related to wealth and to the depreciation adjusted interest rate or yield

The stock market equilibrium condition can be written alternatively in terms of the black market premium actually 1 plus the premium and the ratio of black dollars to wealth The premium is defined as X EE where E represents the official exchange rate and the dollar value of domestic assets is taken as exogenous Dividing equation (1) by wealth

XB(XB+A) =O(i+d-i) (2)

The rate of depreciation of the black dollar d is taken as given The rate of change of the premium is denoted by XX and is equal to the difference between the rate of depreciation the official and black exchange rate or formally

XX =d-d (3)

Substituting equation (3) into the stock market equilibrium condition equashytion (2) and inverting equation in such a way that XX will be on the left-hand side of the equation one can express the relationship between the stock of black dollars the premium and the rate of change of the premium as follows

XX = G(XBA) - (i +d i) G gt 0 (4)

where (XBA) denotes the relative supply of black dollars From equation (4) the dynamic relationship between the above variables is given Equilibrium in the stock market for black dollars requires that an increase in the relative supply of black dollars occur along with an increase in the relative yield via either an increase in the premium or an increase in the official depreciation-adjusted interest rate differential (i + d - i) On the other hand an increase in the official depreciation-adjusted interest rate differential will cause an excess demand for

5

black dollars that must be offset either by a decrease in demand due to a lowering premium or through an increase in supply due to a higher premium

22 The Flow Market for Black Dollars

The demand in the flow market is the product of both import smugglers and tourism out of the country and supply is the product of export smugglers and tourism into the country Following Phylaktis (1992) it is assumed that the flow demand for black dollars is positively related to wealth The current account of the black market is posited to be a function of the premium the official real exchange rate and exports

3 = f (X c exports [A + EE]) (5)

fx gt 0 fe gt 0 f=ports gt 0 and f[A+EBl gt 0 and e represents the official real exchange rate Substituting A AlE into equation (5) the dynamic relationship between 3 B exports and X is obtained for a given value of e and Aas follows

(3 = f(X c exports [4 + EE]) (6)

An increas1in the black market premium is expected to reduce under-invoicing and tourism abroad by domestic tourists Due to the accompanying fall in the relative value of home currency assets there will also be a decrease in wealth At the same time there is an increase in the supply of black dollars to export smugglers or over-invokers Taken together the two effects result in a current account surplus Equilibrium is regained through an increase in the stock of black dollars B which increases wealth and thus the demand for black dollars in the flow market A depreciation of the official real exchange rate is expected to increase net inflows as it makes domestic goods more competitive and thus increases exports and reduces the supply of black dollars to smugglers and tourists

These relationships are demonstrated graphically in Figures A B and C In Figure A a balanced current account is represented by the upward sloping 3= 0 schedule while the x = 0 schedule represents the points at which the premium is constant As can be seen from equation (4) theX = 0 schedule is a rectangular parabola TheX = 0 schedule is drawn for a given (i + d - I) and e Points to the right of 3= 0 represent a premium that is so high as to cause a surplus in the stock of dollars Points to the left on the other hand represent shortage conditions as the result of a low premium Point A represents the point of market

6

equilibrium as indicated by the arrows on the unique trajectory Q As the stock of black dollars rises over time the rate of depreciation of the black dollar decreases relative to that of the official rate

(Insert Figure A) Figure B shows the effects of a shock to the stock market via a change in

the interest rate differential A reduction in the differential by making domestic assets more attractive results in a demand-side shift out of the black market as people shift their money to the official market

(Insert Figure B) Figure C pictures the reaction to the flow market to changes in the real official

exchange rate A real depreciation in the domestic currency leads to increased flow into the black market as the black market rate becomes relatively more attractive The increased flow into the black market causes a shift to the left in the current account balance 3 = O

(Insert Figure C)

3 Data

The developing countries examined in this paper are Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda and Yugoslavia The monthly data starts January 1985 and ends December 1989 The data is from the World Currency Yearbook of various years (Cowitt 1992) The premium vis-a-vis the Official Rate of a currency are based on the unofficial andor illegal prices paid for the US Dollar in the trading centers of the above mentioned countries

The CPI is based on data of the CPI for both the United States and the developing countries The CPI is the monthly price level of the various countries measured in terms of US dollars2 The consumer price indexes are found in the Prices section of the International Financial Statistics (1985-1992) They are compiled from reported versions of national indexes Most countries listed in the International Financial Statistics (IFS) compile their consumer price indexes according to the Laspeyres formula which utilizes weights and selections of items based on consumption patterns

The interest rates used are the Deposit Interest Rates and they are found in the interest rate section of the IFS They include rates offered to resident consumers for demand savings and time deposits The IFS also publishes the exports data

7

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

foreign currency black markets throughout the world The increased demand for such monies as the German Mark and the Swiss Franc reduces the premia for the US Dollar Nonetheless the US dollar is still the primary currency traded in most of the globes black markets serving as a pass-through vehicle to precious metals such as gold energy uses such as oil and other monetary units such as the Japanese Yen the German Mark and the Swiss Franc

Only seventeen countries have currencies that are free from internal black market exchange1 Most other currencies have legislation that limits the foreign exchange available which only serves to generate illegal transactions Controls over monetary exchange only increase the risk and encourage evasion The reshystrictions promote the diversion of scarce money from the official channels to be distributed later in the illegal channels As long as the risk is tolerable there are high incentives to sell on the black market to reap the profits The commodity is purchased at a lower price but is then sold illegally at a higher price on the market because of the demand generated from shortages The more inefficient a countrys reserves or financial capacities the greater the likelihood of a vigorously organized black market The stringent regulations or punishments only serve to increase the premium between the black and the official foreign exchange rates If a large proportion of foreign exchange transactions are conducted in this manner the devaluation of official rates can affect consumer prices as well as the entire economy

Legislative controls and rationing that attempt to fight black markets often contribute instead to higher activities in the black market for foreign exchange The enforcement of governmental policies price ceilings and restrictions on forshyeign currency help increase scarcity which in turn encourages accumulation for later illegal transactions Attempts by governments are usually ineffective unless they are also accompanied by increases in productivity price stability and availshyability of goods Without careful monitoring of these actions transactions in the black market are going to persist despite government interventions

The designing of monetary policy in each country depends on the official economy This economy involves open transactions financed through identifishyable sources and generates income within the parameters of government rules and regulations In addition to the official economy many countries particularly developing ones have developed a parallel economy

This parallel economy or black market emerges through the manipulation of the economic forces of supply and demand for both currency and commodities A

3

black market also emerges when trade and industry create an artificial situation of scarcity or glut and in the process amass high returns on their investments by profiteering As a result of profiteering activity the black market generates unreported income and wealth which escape detection by official statistics (Culshybertson 1975 Ray 1981 Nowak 1985 Manasian et al 1987 Roemer and Jones 1991 and Argy 1994)

Gupta (1981) attributes much of the strength of the black market to the resale of officially allocated foreign exchange holdings and to the incentive to undershyinvoice and smuggle exports He argues that an increase in the black market rate given the official exchange rate creates an incentive for residents abroad to channel their remittances through the black market This raises their private receipts in terms of home currency and deprives the central bank of this foreign exchange Economists studying black market activity in developing countries advocate that it is best to keep the black market premium rate as low as possible (Gupta 1981) By influencing the determinants of the black market exchange rate developing counties can keep the black market premium rate low and increase their official foreign exchange currency holdings

The paperis organized as follows Section 2 presents the model for the preshymium on the black dollar Section 3 introduces the data Section 4 details the empirical results Section 5 summarizes

2 The Model

The model is based on that of Dornbusch et aL (1983) The black market is treated in a partial-equilibrium stock and flow framework The interest rate on the home currency the US interest rate the official exchange rate and the domestic currency value of non-dollar assets are taken as given The stock demand for black dollars arises as the result of portfolio diversification and the flow market arises as the result of international trade both reported and unreported

21 The Stock Demand for Black Dollars

The stock demand for black dollars is posited to be positively related to wealth and the official depreciation-adjusted interest rate Equilibrium in the stock market for dollars must meet the condition that supply equal demand Using the notation of Dornbusch et al this relation may be expressed as follows

4

EB = 0 (i +d - i)(A + EB) 0 gt 0(1) (1)

Thus EB represents the supply of black dollars and q is a positive function of o (i + d - i)(A + EB) where E represents the black market exchange rate B the stock of black dollars i the interest rate on US dollars d the rate of depreciation of the home currency in the black market i the interest rate on the home currency A represents the value of non-dollar assets As stated above demand is posited to be positively related to wealth and to the depreciation adjusted interest rate or yield

The stock market equilibrium condition can be written alternatively in terms of the black market premium actually 1 plus the premium and the ratio of black dollars to wealth The premium is defined as X EE where E represents the official exchange rate and the dollar value of domestic assets is taken as exogenous Dividing equation (1) by wealth

XB(XB+A) =O(i+d-i) (2)

The rate of depreciation of the black dollar d is taken as given The rate of change of the premium is denoted by XX and is equal to the difference between the rate of depreciation the official and black exchange rate or formally

XX =d-d (3)

Substituting equation (3) into the stock market equilibrium condition equashytion (2) and inverting equation in such a way that XX will be on the left-hand side of the equation one can express the relationship between the stock of black dollars the premium and the rate of change of the premium as follows

XX = G(XBA) - (i +d i) G gt 0 (4)

where (XBA) denotes the relative supply of black dollars From equation (4) the dynamic relationship between the above variables is given Equilibrium in the stock market for black dollars requires that an increase in the relative supply of black dollars occur along with an increase in the relative yield via either an increase in the premium or an increase in the official depreciation-adjusted interest rate differential (i + d - i) On the other hand an increase in the official depreciation-adjusted interest rate differential will cause an excess demand for

5

black dollars that must be offset either by a decrease in demand due to a lowering premium or through an increase in supply due to a higher premium

22 The Flow Market for Black Dollars

The demand in the flow market is the product of both import smugglers and tourism out of the country and supply is the product of export smugglers and tourism into the country Following Phylaktis (1992) it is assumed that the flow demand for black dollars is positively related to wealth The current account of the black market is posited to be a function of the premium the official real exchange rate and exports

3 = f (X c exports [A + EE]) (5)

fx gt 0 fe gt 0 f=ports gt 0 and f[A+EBl gt 0 and e represents the official real exchange rate Substituting A AlE into equation (5) the dynamic relationship between 3 B exports and X is obtained for a given value of e and Aas follows

(3 = f(X c exports [4 + EE]) (6)

An increas1in the black market premium is expected to reduce under-invoicing and tourism abroad by domestic tourists Due to the accompanying fall in the relative value of home currency assets there will also be a decrease in wealth At the same time there is an increase in the supply of black dollars to export smugglers or over-invokers Taken together the two effects result in a current account surplus Equilibrium is regained through an increase in the stock of black dollars B which increases wealth and thus the demand for black dollars in the flow market A depreciation of the official real exchange rate is expected to increase net inflows as it makes domestic goods more competitive and thus increases exports and reduces the supply of black dollars to smugglers and tourists

These relationships are demonstrated graphically in Figures A B and C In Figure A a balanced current account is represented by the upward sloping 3= 0 schedule while the x = 0 schedule represents the points at which the premium is constant As can be seen from equation (4) theX = 0 schedule is a rectangular parabola TheX = 0 schedule is drawn for a given (i + d - I) and e Points to the right of 3= 0 represent a premium that is so high as to cause a surplus in the stock of dollars Points to the left on the other hand represent shortage conditions as the result of a low premium Point A represents the point of market

6

equilibrium as indicated by the arrows on the unique trajectory Q As the stock of black dollars rises over time the rate of depreciation of the black dollar decreases relative to that of the official rate

(Insert Figure A) Figure B shows the effects of a shock to the stock market via a change in

the interest rate differential A reduction in the differential by making domestic assets more attractive results in a demand-side shift out of the black market as people shift their money to the official market

(Insert Figure B) Figure C pictures the reaction to the flow market to changes in the real official

exchange rate A real depreciation in the domestic currency leads to increased flow into the black market as the black market rate becomes relatively more attractive The increased flow into the black market causes a shift to the left in the current account balance 3 = O

(Insert Figure C)

3 Data

The developing countries examined in this paper are Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda and Yugoslavia The monthly data starts January 1985 and ends December 1989 The data is from the World Currency Yearbook of various years (Cowitt 1992) The premium vis-a-vis the Official Rate of a currency are based on the unofficial andor illegal prices paid for the US Dollar in the trading centers of the above mentioned countries

The CPI is based on data of the CPI for both the United States and the developing countries The CPI is the monthly price level of the various countries measured in terms of US dollars2 The consumer price indexes are found in the Prices section of the International Financial Statistics (1985-1992) They are compiled from reported versions of national indexes Most countries listed in the International Financial Statistics (IFS) compile their consumer price indexes according to the Laspeyres formula which utilizes weights and selections of items based on consumption patterns

The interest rates used are the Deposit Interest Rates and they are found in the interest rate section of the IFS They include rates offered to resident consumers for demand savings and time deposits The IFS also publishes the exports data

7

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

black market also emerges when trade and industry create an artificial situation of scarcity or glut and in the process amass high returns on their investments by profiteering As a result of profiteering activity the black market generates unreported income and wealth which escape detection by official statistics (Culshybertson 1975 Ray 1981 Nowak 1985 Manasian et al 1987 Roemer and Jones 1991 and Argy 1994)

Gupta (1981) attributes much of the strength of the black market to the resale of officially allocated foreign exchange holdings and to the incentive to undershyinvoice and smuggle exports He argues that an increase in the black market rate given the official exchange rate creates an incentive for residents abroad to channel their remittances through the black market This raises their private receipts in terms of home currency and deprives the central bank of this foreign exchange Economists studying black market activity in developing countries advocate that it is best to keep the black market premium rate as low as possible (Gupta 1981) By influencing the determinants of the black market exchange rate developing counties can keep the black market premium rate low and increase their official foreign exchange currency holdings

The paperis organized as follows Section 2 presents the model for the preshymium on the black dollar Section 3 introduces the data Section 4 details the empirical results Section 5 summarizes

2 The Model

The model is based on that of Dornbusch et aL (1983) The black market is treated in a partial-equilibrium stock and flow framework The interest rate on the home currency the US interest rate the official exchange rate and the domestic currency value of non-dollar assets are taken as given The stock demand for black dollars arises as the result of portfolio diversification and the flow market arises as the result of international trade both reported and unreported

21 The Stock Demand for Black Dollars

The stock demand for black dollars is posited to be positively related to wealth and the official depreciation-adjusted interest rate Equilibrium in the stock market for dollars must meet the condition that supply equal demand Using the notation of Dornbusch et al this relation may be expressed as follows

4

EB = 0 (i +d - i)(A + EB) 0 gt 0(1) (1)

Thus EB represents the supply of black dollars and q is a positive function of o (i + d - i)(A + EB) where E represents the black market exchange rate B the stock of black dollars i the interest rate on US dollars d the rate of depreciation of the home currency in the black market i the interest rate on the home currency A represents the value of non-dollar assets As stated above demand is posited to be positively related to wealth and to the depreciation adjusted interest rate or yield

The stock market equilibrium condition can be written alternatively in terms of the black market premium actually 1 plus the premium and the ratio of black dollars to wealth The premium is defined as X EE where E represents the official exchange rate and the dollar value of domestic assets is taken as exogenous Dividing equation (1) by wealth

XB(XB+A) =O(i+d-i) (2)

The rate of depreciation of the black dollar d is taken as given The rate of change of the premium is denoted by XX and is equal to the difference between the rate of depreciation the official and black exchange rate or formally

XX =d-d (3)

Substituting equation (3) into the stock market equilibrium condition equashytion (2) and inverting equation in such a way that XX will be on the left-hand side of the equation one can express the relationship between the stock of black dollars the premium and the rate of change of the premium as follows

XX = G(XBA) - (i +d i) G gt 0 (4)

where (XBA) denotes the relative supply of black dollars From equation (4) the dynamic relationship between the above variables is given Equilibrium in the stock market for black dollars requires that an increase in the relative supply of black dollars occur along with an increase in the relative yield via either an increase in the premium or an increase in the official depreciation-adjusted interest rate differential (i + d - i) On the other hand an increase in the official depreciation-adjusted interest rate differential will cause an excess demand for

5

black dollars that must be offset either by a decrease in demand due to a lowering premium or through an increase in supply due to a higher premium

22 The Flow Market for Black Dollars

The demand in the flow market is the product of both import smugglers and tourism out of the country and supply is the product of export smugglers and tourism into the country Following Phylaktis (1992) it is assumed that the flow demand for black dollars is positively related to wealth The current account of the black market is posited to be a function of the premium the official real exchange rate and exports

3 = f (X c exports [A + EE]) (5)

fx gt 0 fe gt 0 f=ports gt 0 and f[A+EBl gt 0 and e represents the official real exchange rate Substituting A AlE into equation (5) the dynamic relationship between 3 B exports and X is obtained for a given value of e and Aas follows

(3 = f(X c exports [4 + EE]) (6)

An increas1in the black market premium is expected to reduce under-invoicing and tourism abroad by domestic tourists Due to the accompanying fall in the relative value of home currency assets there will also be a decrease in wealth At the same time there is an increase in the supply of black dollars to export smugglers or over-invokers Taken together the two effects result in a current account surplus Equilibrium is regained through an increase in the stock of black dollars B which increases wealth and thus the demand for black dollars in the flow market A depreciation of the official real exchange rate is expected to increase net inflows as it makes domestic goods more competitive and thus increases exports and reduces the supply of black dollars to smugglers and tourists

These relationships are demonstrated graphically in Figures A B and C In Figure A a balanced current account is represented by the upward sloping 3= 0 schedule while the x = 0 schedule represents the points at which the premium is constant As can be seen from equation (4) theX = 0 schedule is a rectangular parabola TheX = 0 schedule is drawn for a given (i + d - I) and e Points to the right of 3= 0 represent a premium that is so high as to cause a surplus in the stock of dollars Points to the left on the other hand represent shortage conditions as the result of a low premium Point A represents the point of market

6

equilibrium as indicated by the arrows on the unique trajectory Q As the stock of black dollars rises over time the rate of depreciation of the black dollar decreases relative to that of the official rate

(Insert Figure A) Figure B shows the effects of a shock to the stock market via a change in

the interest rate differential A reduction in the differential by making domestic assets more attractive results in a demand-side shift out of the black market as people shift their money to the official market

(Insert Figure B) Figure C pictures the reaction to the flow market to changes in the real official

exchange rate A real depreciation in the domestic currency leads to increased flow into the black market as the black market rate becomes relatively more attractive The increased flow into the black market causes a shift to the left in the current account balance 3 = O

(Insert Figure C)

3 Data

The developing countries examined in this paper are Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda and Yugoslavia The monthly data starts January 1985 and ends December 1989 The data is from the World Currency Yearbook of various years (Cowitt 1992) The premium vis-a-vis the Official Rate of a currency are based on the unofficial andor illegal prices paid for the US Dollar in the trading centers of the above mentioned countries

The CPI is based on data of the CPI for both the United States and the developing countries The CPI is the monthly price level of the various countries measured in terms of US dollars2 The consumer price indexes are found in the Prices section of the International Financial Statistics (1985-1992) They are compiled from reported versions of national indexes Most countries listed in the International Financial Statistics (IFS) compile their consumer price indexes according to the Laspeyres formula which utilizes weights and selections of items based on consumption patterns

The interest rates used are the Deposit Interest Rates and they are found in the interest rate section of the IFS They include rates offered to resident consumers for demand savings and time deposits The IFS also publishes the exports data

7

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

EB = 0 (i +d - i)(A + EB) 0 gt 0(1) (1)

Thus EB represents the supply of black dollars and q is a positive function of o (i + d - i)(A + EB) where E represents the black market exchange rate B the stock of black dollars i the interest rate on US dollars d the rate of depreciation of the home currency in the black market i the interest rate on the home currency A represents the value of non-dollar assets As stated above demand is posited to be positively related to wealth and to the depreciation adjusted interest rate or yield

The stock market equilibrium condition can be written alternatively in terms of the black market premium actually 1 plus the premium and the ratio of black dollars to wealth The premium is defined as X EE where E represents the official exchange rate and the dollar value of domestic assets is taken as exogenous Dividing equation (1) by wealth

XB(XB+A) =O(i+d-i) (2)

The rate of depreciation of the black dollar d is taken as given The rate of change of the premium is denoted by XX and is equal to the difference between the rate of depreciation the official and black exchange rate or formally

XX =d-d (3)

Substituting equation (3) into the stock market equilibrium condition equashytion (2) and inverting equation in such a way that XX will be on the left-hand side of the equation one can express the relationship between the stock of black dollars the premium and the rate of change of the premium as follows

XX = G(XBA) - (i +d i) G gt 0 (4)

where (XBA) denotes the relative supply of black dollars From equation (4) the dynamic relationship between the above variables is given Equilibrium in the stock market for black dollars requires that an increase in the relative supply of black dollars occur along with an increase in the relative yield via either an increase in the premium or an increase in the official depreciation-adjusted interest rate differential (i + d - i) On the other hand an increase in the official depreciation-adjusted interest rate differential will cause an excess demand for

5

black dollars that must be offset either by a decrease in demand due to a lowering premium or through an increase in supply due to a higher premium

22 The Flow Market for Black Dollars

The demand in the flow market is the product of both import smugglers and tourism out of the country and supply is the product of export smugglers and tourism into the country Following Phylaktis (1992) it is assumed that the flow demand for black dollars is positively related to wealth The current account of the black market is posited to be a function of the premium the official real exchange rate and exports

3 = f (X c exports [A + EE]) (5)

fx gt 0 fe gt 0 f=ports gt 0 and f[A+EBl gt 0 and e represents the official real exchange rate Substituting A AlE into equation (5) the dynamic relationship between 3 B exports and X is obtained for a given value of e and Aas follows

(3 = f(X c exports [4 + EE]) (6)

An increas1in the black market premium is expected to reduce under-invoicing and tourism abroad by domestic tourists Due to the accompanying fall in the relative value of home currency assets there will also be a decrease in wealth At the same time there is an increase in the supply of black dollars to export smugglers or over-invokers Taken together the two effects result in a current account surplus Equilibrium is regained through an increase in the stock of black dollars B which increases wealth and thus the demand for black dollars in the flow market A depreciation of the official real exchange rate is expected to increase net inflows as it makes domestic goods more competitive and thus increases exports and reduces the supply of black dollars to smugglers and tourists

These relationships are demonstrated graphically in Figures A B and C In Figure A a balanced current account is represented by the upward sloping 3= 0 schedule while the x = 0 schedule represents the points at which the premium is constant As can be seen from equation (4) theX = 0 schedule is a rectangular parabola TheX = 0 schedule is drawn for a given (i + d - I) and e Points to the right of 3= 0 represent a premium that is so high as to cause a surplus in the stock of dollars Points to the left on the other hand represent shortage conditions as the result of a low premium Point A represents the point of market

6

equilibrium as indicated by the arrows on the unique trajectory Q As the stock of black dollars rises over time the rate of depreciation of the black dollar decreases relative to that of the official rate

(Insert Figure A) Figure B shows the effects of a shock to the stock market via a change in

the interest rate differential A reduction in the differential by making domestic assets more attractive results in a demand-side shift out of the black market as people shift their money to the official market

(Insert Figure B) Figure C pictures the reaction to the flow market to changes in the real official

exchange rate A real depreciation in the domestic currency leads to increased flow into the black market as the black market rate becomes relatively more attractive The increased flow into the black market causes a shift to the left in the current account balance 3 = O

(Insert Figure C)

3 Data

The developing countries examined in this paper are Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda and Yugoslavia The monthly data starts January 1985 and ends December 1989 The data is from the World Currency Yearbook of various years (Cowitt 1992) The premium vis-a-vis the Official Rate of a currency are based on the unofficial andor illegal prices paid for the US Dollar in the trading centers of the above mentioned countries

The CPI is based on data of the CPI for both the United States and the developing countries The CPI is the monthly price level of the various countries measured in terms of US dollars2 The consumer price indexes are found in the Prices section of the International Financial Statistics (1985-1992) They are compiled from reported versions of national indexes Most countries listed in the International Financial Statistics (IFS) compile their consumer price indexes according to the Laspeyres formula which utilizes weights and selections of items based on consumption patterns

The interest rates used are the Deposit Interest Rates and they are found in the interest rate section of the IFS They include rates offered to resident consumers for demand savings and time deposits The IFS also publishes the exports data

7

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

black dollars that must be offset either by a decrease in demand due to a lowering premium or through an increase in supply due to a higher premium

22 The Flow Market for Black Dollars

The demand in the flow market is the product of both import smugglers and tourism out of the country and supply is the product of export smugglers and tourism into the country Following Phylaktis (1992) it is assumed that the flow demand for black dollars is positively related to wealth The current account of the black market is posited to be a function of the premium the official real exchange rate and exports

3 = f (X c exports [A + EE]) (5)

fx gt 0 fe gt 0 f=ports gt 0 and f[A+EBl gt 0 and e represents the official real exchange rate Substituting A AlE into equation (5) the dynamic relationship between 3 B exports and X is obtained for a given value of e and Aas follows

(3 = f(X c exports [4 + EE]) (6)

An increas1in the black market premium is expected to reduce under-invoicing and tourism abroad by domestic tourists Due to the accompanying fall in the relative value of home currency assets there will also be a decrease in wealth At the same time there is an increase in the supply of black dollars to export smugglers or over-invokers Taken together the two effects result in a current account surplus Equilibrium is regained through an increase in the stock of black dollars B which increases wealth and thus the demand for black dollars in the flow market A depreciation of the official real exchange rate is expected to increase net inflows as it makes domestic goods more competitive and thus increases exports and reduces the supply of black dollars to smugglers and tourists

These relationships are demonstrated graphically in Figures A B and C In Figure A a balanced current account is represented by the upward sloping 3= 0 schedule while the x = 0 schedule represents the points at which the premium is constant As can be seen from equation (4) theX = 0 schedule is a rectangular parabola TheX = 0 schedule is drawn for a given (i + d - I) and e Points to the right of 3= 0 represent a premium that is so high as to cause a surplus in the stock of dollars Points to the left on the other hand represent shortage conditions as the result of a low premium Point A represents the point of market

6

equilibrium as indicated by the arrows on the unique trajectory Q As the stock of black dollars rises over time the rate of depreciation of the black dollar decreases relative to that of the official rate

(Insert Figure A) Figure B shows the effects of a shock to the stock market via a change in

the interest rate differential A reduction in the differential by making domestic assets more attractive results in a demand-side shift out of the black market as people shift their money to the official market

(Insert Figure B) Figure C pictures the reaction to the flow market to changes in the real official

exchange rate A real depreciation in the domestic currency leads to increased flow into the black market as the black market rate becomes relatively more attractive The increased flow into the black market causes a shift to the left in the current account balance 3 = O

(Insert Figure C)

3 Data

The developing countries examined in this paper are Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda and Yugoslavia The monthly data starts January 1985 and ends December 1989 The data is from the World Currency Yearbook of various years (Cowitt 1992) The premium vis-a-vis the Official Rate of a currency are based on the unofficial andor illegal prices paid for the US Dollar in the trading centers of the above mentioned countries

The CPI is based on data of the CPI for both the United States and the developing countries The CPI is the monthly price level of the various countries measured in terms of US dollars2 The consumer price indexes are found in the Prices section of the International Financial Statistics (1985-1992) They are compiled from reported versions of national indexes Most countries listed in the International Financial Statistics (IFS) compile their consumer price indexes according to the Laspeyres formula which utilizes weights and selections of items based on consumption patterns

The interest rates used are the Deposit Interest Rates and they are found in the interest rate section of the IFS They include rates offered to resident consumers for demand savings and time deposits The IFS also publishes the exports data

7

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

equilibrium as indicated by the arrows on the unique trajectory Q As the stock of black dollars rises over time the rate of depreciation of the black dollar decreases relative to that of the official rate

(Insert Figure A) Figure B shows the effects of a shock to the stock market via a change in

the interest rate differential A reduction in the differential by making domestic assets more attractive results in a demand-side shift out of the black market as people shift their money to the official market

(Insert Figure B) Figure C pictures the reaction to the flow market to changes in the real official

exchange rate A real depreciation in the domestic currency leads to increased flow into the black market as the black market rate becomes relatively more attractive The increased flow into the black market causes a shift to the left in the current account balance 3 = O

(Insert Figure C)

3 Data

The developing countries examined in this paper are Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda and Yugoslavia The monthly data starts January 1985 and ends December 1989 The data is from the World Currency Yearbook of various years (Cowitt 1992) The premium vis-a-vis the Official Rate of a currency are based on the unofficial andor illegal prices paid for the US Dollar in the trading centers of the above mentioned countries

The CPI is based on data of the CPI for both the United States and the developing countries The CPI is the monthly price level of the various countries measured in terms of US dollars2 The consumer price indexes are found in the Prices section of the International Financial Statistics (1985-1992) They are compiled from reported versions of national indexes Most countries listed in the International Financial Statistics (IFS) compile their consumer price indexes according to the Laspeyres formula which utilizes weights and selections of items based on consumption patterns

The interest rates used are the Deposit Interest Rates and they are found in the interest rate section of the IFS They include rates offered to resident consumers for demand savings and time deposits The IFS also publishes the exports data

7

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

measured in millions of US dollars The official exchange rates measured by the IFS are expressed in US dollars per national currency unit This model uses the ae series official exchange rates which denote end of the period exchange rates

Figure 01 presents the black market premia for the US Dollar based on the official rate at the end of December 1988 The premia range from 2 percent in Ireland to 430 percent for Guyana in that period Figure 02 presents some summary statistics for each of the black official and premium dollar exchange rates It is clear from the figure that different countries have very different patterns of black and official dollar exchange rates These patterns are visualized in Figures 1 - 17 where the black official and the premium exchange rate for each country are presented as a function of time The left y-axis measures the black and the official exchange rates with respect to the US dollar The premium as a function of time is measured on the right y-axis It is of particular interest to ascertain whether the model presented above is capable of explaining the premium as a function of the variables introduced above

The cross-sectional data is pooled and estimated by OLS Dummy variables are constructed to represent the seventeen developing countries used in this pashyper Dummy variables are also constructed to represent a seasonal factor and time dimension The seasonal factor is estimated in two ways First an eleven month dummy variable is constructed to capture monthly tourist movements eishyther into or out of the country in question Second a bi-monthly dummy variable is constructed to capture the effects of tourist movements by season either high or low tourist travel season The time dimension dummy variables are constructed to capture the fluctuation in the premium for the years of 1985 1986 1987 and 1988

4 Empirical Results

As can be seen in Figure 03 the empirical results are very supportive of the model The first set of results called Modell is obtained by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho and the country dummy variables In this set of results every variable tested is found to be significant at the 5 level and of the expected sign The R-squared and adjusted R-squared are over 099 The country dummy variables show that in each of the seventeen countries the premium is declining

8

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

The second set of results called Model 2 shown in Figure 03 is obtained

by testing the premium against the dollar value of the domestic assets the real exchange rate the interest rate differential exports Rho the country dummy variables and the time dummy variables Each of the results with the exception of the time dummy variables is significant at the 10 level The coefficients of country dummy variables are again all negative demonstrating a declining premIum

The third set of results called Model 3 shown in Figure 03 is obtained by testing the premium against the same variables in the first with the addition of the time dummy variable and the eleven month seasonal dummy variable It is found that the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are found to be significant at the 10 level Each of the country variables is significant at 5 and negative Unexpectedly the time and seasonal variables are not found to be significant Nonetheless the R-squared and adjusted R-squared values are above 099

The fourth set of results is obtained from the same variables as the second with the addition of the bi-monthly seasonal factor in the place of the eleven month factor The country variables are each significant at 5 and negative The dollar value of domestic assets the real exchange rate the interest rate differential and Rho are all significant at the 10 level

In Figure 04 two additional sets of results are presented First the results of the premium tested against the dollar value of domestic assets the real exchange rate the interest rate differential and Rho are included Second the results of the premium tested against the above variables and the time dummy variables are included The results summarized in Figure 04 all have R-squared and adjusted R-squared values of over 099 even though the significance of the coefficients is not as supportive as in the cases of the results presented in Figure 03

In Figures 05 to 08 the model is tested with adjustments for the different sizes of the economies examined and the results are summarized In this paper the developing countries examined have economies of vastly differing sizes Thus in order to adjust for the variations in the size of the economies examined the assets A and ~xports variables are divided by the gross domestic product (GDP) of the country in question in Figures 05 and 06 and the population of the country in question in Figures 07 and 08 The results obtained from these adjustments are similar to those in Figure 03

In Figures 05 and 06 the results found for the GDP-adjusted dollar value of

9

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

domestic assets interest rate differential Rho and the country dummy variables are supportive of the model However the results presented in Figures 05 and 06 demonstrate that the real exchange rate and GDP-adjusted exports are not significant The results presented in Figures 07 and 08 demonstrate that the population-adjusted assets real exchange rate and population-adjusted exports are not significant but that the interest rate differential Rho the country dummy variables the month of January in Model 5 and JanuaryFebruary in Model 6 are significant at the 10 leveL

5 Conclusion

This paper develops a model with which to explain the effects of various economic factors on the black market exchange rate premium It uses monthly data beginshyning in 1985 and ending in 1989 The empirical results are very supportive of the model and agree with the findings of Dornbusch et a1 (1983) R-squared and adjusted R-squared values are all above 099 It is found that the interest rate differential and assets positively influence the premium as is expected The official real exchange rate is found to negatively influence the premium

Unexpectedly neither the seasonal factors nor the time dummy variables are found to significantly affect the premium It is very interesting that the coefficient values of the country dummy variables are all negative This suggests that the premium in all of these countries is decreasing

These results are important because they provide a starting point for governshyments to control the level of black market activity Developing countries appear to be the most disastrously affected by black market activity This may be due to a strong distrust in the ability of the free market to regulate supply and demand in these countries In addition third world governments heavily embed foreign sector regulations into their planned programs

However the most important reason for the harmful impact of high black market activity on developing nations is the flight of much needed capital abroad Developing countries can stem the tide of foreign currency out of the country through appropriate economic policy A proper policy in light of the findings of this paper would tend to reduce the incentives of the population to resort to black market activities and thus to contribute more to the official economy By implementing policies which monitor andor affect the variables examined in this study governments in developing countries can control the level of black market

10

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

activity and lessen its negative impact on the development of their economies

11

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

Notes

1 The countries are Bahrain Djibouti Hong Kong Kuwait Lebanon Malaysia Netherlands Oman Panama Qatar Saudi Arabia Seychelles Singapore United Arab Emirates United Kingdom and the United States (World Currency Yearbook 1989)

2 Summers and Heston (1988) provide yearly but not monthly purchasing power parity price levels estimates

12

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

References

[1] Argy V (1994) International Macroeconomics Theory and Policy Lonshydon Rutledge

[2] Baghestani H and Noer J (1993) Cointegration Analysis of the Black Market and Official Exchange Rates in India Journal of Macroeconomics Winter Vol 15 pp 709-720

[3] Brown B and Maital S (1981) What Do Economists Know An Empirical Study of Experts Expectations Econometrica Vol 49 pp 1287-1294

[4] Cowitt P P (1992) 1988-1989 World Currency Yearbook Brooklyn Intershynational Currency Analysis Inc

(5] Culbertson WP Jr (1975) Purchasing Power Parity and the Black Exshychange Rates Economic Inquiry Vol 13 287-296

(6] Dornbusch R Daniel V Dantas Clarice Pechman Roberto De Rezende Rocha and Demetrio SimOes The Black Market for Dollars in Brazil The Quarterly Journal of Economics February 1983 pp25-40

(7] Ethier W J (1995) Modern International Economics Third Edition W W Norton New York and London

[8J Hayashi F and Sims CA (1983) Nearly Efficient Estimation of Time Series Models with Predetermined But Not Exogenous Instruments Econometrica Vol 51 pp 783-798

[9] Gupta S (1981) Black Market Exchange Rates Tubingen Mohr

[10] International Monetary Fund International Financial Statistics 1985-1992

[11] Krugman PR and Obstfeld M (1994) International Economics Theory and Policy Third Edition Harper Collins College Publisher

[12J Manasian D Leigh B Bernier L Ingersoll R Pilarski L Reed C Mollett P and Skole R (1987) Europes Booming Black Economy International Management Vol 42 JulyAugust pp 24-30

13

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

[13] Nowak M (1985) Black Markets in Foreign Exchange Finance And Development Vol 22 March 1985 pp 20-23

[14] Phylaktis K and Kassimatis Y (1994) Black and Official Exchange Rates in the Pacific Basin Countries An Analysis of Their Long-Run Dyshynamics Applied Economics Vol 26 April 1994 pp 399-407

[15] Ray SK (1981) Economics of the Black Market Boulder Westview Press

[16] Roemer M and Jones C (1991) Markets in Developing Countries ICS Press San Francisco

[17] Summers R and Heston A (1988) A New Set of International Comparshyisons of Real Product and Price Levels Estimates for 130 Countries 1950shy1985 Review of Income and Wealth series 34 No1 1-25

[18] White H (1980) A Heteroskedasticity-Consistent Covariance Matrix Esshytimator a~d Direct Test for Heteroskedasticity Econometrica Vol 48 pp 817-838

[19] World Currency Yearbook (1984-1989) Brooklyn NY International Curshyrency Analysis Inc

14

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

Figure 01 Black Market Premiums for the US Dollar (Based on Official Rate at the End of December 1988)

Bangladesh Brazil Fiji Gambia Ghana Guyana Hungary Ireland Jamaica Kenya Nepal Nigeria Philippines Somalia South Africa Uganda Yugoslavia

318 57 13 36 36

43000 56

2 22 13) 61 8700 3

48) 5

261) 17

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

Figure 02 Statistics for Black Official and Premium Dollar Exchange Rates

Mean to error MInimUm MaXimum Me Ian iSangalaaesnBEX 9156 OFFEX 3074 PB 6099

2215 159 208

373 26

103

128 3227

96

9688 31

6569 1iS3z11 BEX 40049 OFFEX 5585175 PB -6162929

80635 6873598 7013299

4 8804

-278936

3300 278940 259167

3705 223917 -422017

II-IJI BEX 077 OFFEX 129 PB -05

012 017 028

057 107 -094

096 153 -013

08 129 -038

1~_amDlaBEX 016 OFFEX 644 PB -611

005 143 145

01 337 -768

028 832 -309

013 699 -677

~anaBEX 20956 OFFEX 15528 PB 6887

5904 8063 2432

120 50

1773

339 30303 12999

215 14993 6789

juyanaBEX 4491 OFFEX 1115 PB 3618

1057 963 911

19 415 147

58 33

477

50 10 40

HungaryBEX 647 OFFEX 5048 PB 1528

769 517 448

512 4358 672

87 629 2946

624 4824 1429

r~lana BEX 137 OFFEX 074 PB 062

018 011 03

091 06

-016

16 107

1

142 07 072

Jamaica SEX 649 OFFEX 555 PB 099

03 024 031

555 504 031

74 648 192

648 548 099

IKenyaBEX 1909 OFFEX 1751 PS 203

278 18

201

1485 16

-119

245 2186 648

189 166 24

INepalBEX 2726 OFFEX 2246 PB 544

719 309 522

199 173 -15

46 286 187

2475 2185

4

IsE=rrla 02 OFFEX 375 PB -314

007 237 22

007 083 -749

032 765 -055

019 404 -376

1~~lIIppmesBEX 2141 OFFEX 2052 PB 107

17 113 099

169 1836 -157

24 2244 354

22 2059 099

I)omauaBEX 23065 OFFEX 17999 PB 10236

19711 19149 9732

40 36 4

800 9295 426

1535 100 70

)OUUJATnCaBEX 041 OFFEX 23 PB -185

005 027 029

029 19

-245

052 279 -141

041 226 -18

uganaaSEX 22108 OFFEX 8122 PB 16195

22471 9401651

59 55 035

625 370 460

12125 60

955 yugoslaviaSEX 235931 OFFEX 074 PB 23591

37788 196

377845

238 002

23798

18000 1182

1799826

705 007

70494

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

Figure 03 Regression Results

ionstant A e II a lexportS ~no tlanglaoes tlraZIl IJI uamDla unana Iiuyan degGElICoefficient7681293 0000 -809407 0344 -0126 0333 -7735934 -7340035-7235770-7604116-7674863-761221 T-Statistic 17699 2924 -1980 4337 -2006 9333 -17939 -16642 -14007 -17213 -17679 -17288

~~~~int7757125 0000 -78049170336171-01357460325456 -7826089 -7403191-7341212-7696393-7764053-770446 T-Statistic 17544342906188-17745934095847 -20705529049065 -179443 -1670685-1366091-1713593-1766865-172215

1degGElI$Coefficient7731867 0000 -790186 0338 -0108 0326 -7808155 -7445739-7318297-7677422-7747615-768632 T-Statistic 17267 2803 -1781 4093 -1587 8980 -17755 -16633 -13512 -16955 -17487 -17043 IMoael4 Coefficient7743748 0000 -806317 0337 -0110 0324 -7828606 -7461650-7329110-7695661-7767289-770489 T-Statistic 17391 2850 -1824 4100 -1626 8970 -17879 -16753 -13579 -17066 -17608 -17156

HUngary Ireland Jamaica Kenya Nepal Nigeria PhlllppmeSSomalia S Afflca Uganda 1985 IMoaell Coefficient-7847297-7545914-7592658-7657151-7666936-7649476 -7732438 -7663612-7666220-7714569 T-Statistic -18060 -17387 -17184 -17573 -17579 -17650 -18046 -17506 -17800 -16720 IMoael Coefficient-7935994-7625859-7684923-7747288-77574n7741877 -7826922 -7755591-7743192-77972431175963 T -Statistic -1807206-1742686-1710568-1754464-1754786-1761909 -1805642 -1783423-1751767-16706180331696

1~~~nt-7906185-7640133-7667108-7730624-773901g7733882 -7817345 -7726914-7767278-7782978 16172 T-Statistic -17830 -17315 -16929 -17364 -17363 -17461 -17887 -17340 -17716 -16543 0426

1~~int-7921149-765758amp7685155-7749850-7758400-7752130 -7836903 -7746970-7785165-7802058 14824 T-Statistic -17952 -17436 -17039 -17482 -17481 -17578 -18012 -17462 -17839 -16669 0393

1986 1987 1988 Jan Feb Mar A r Ma Jun Jul AU

43351 6288 1250 0185

43132 5821 1247 0172

49713 25674 4537 -8445 -30664 -5863 -7530 59395 1064 0584 0106 -0195 -0708 -0137 -0167 1309

)epl VCI rwov II MIA M I )V vas ~) A~ iMoaell Coefficient T -Statistic

--

--

-- --

--

--

--

--

707 0994 0993

IMoael

I~~it~rentStatistic --

--

--

--

--

--

--

--707 0993678099344

ildegael~ Coefficient T -Statistic

2440 0054

18656 0412

-17318 -0382 -

--

-- --

--

707 0994 0993

IMoael4 Coefficient - - - 44367 6379 -9884 34288 18807 707 0994 0993 T -Statistic - - - 1354 0206 -0319 1063 0587

Notell represents the dollar value of domestic assets arepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black mar1ltet premium Jan represents January Feb represents February and so forth through November JF represents January and February MIA represents March and April MJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 3

Figure 04 Additional Regression Results

ons[an[ Moaell

e (I + a + IItXPOrtS I(no ~anllaaesn ~razll 111 uamDla unana uuyan

Coefficient 3128 0000 -40961 0005 -0019 0991 T -Statistic 0207 1411 -0548 0059 -0795 198656 IMoael Coefficient -13954 0000 -42780 -0004 -0019 0991 T -Statistic -0414 1446 -0570 -0046 -0829 196450 IMoael ~ Coefficient 6287 0000 -39256 0005 -0017 0991 T -Statistic 0161 l~oa~14 Coefficient -7694 T -Statistic -0263

1368

0000 1406

-0524

-41142 -0550

0053 -0727

0003 middot0018 0034 -0752

198049

0991 198393 - -

Hun a Ireland Jamaica Ken a Nepal Ni erla Pnlil meSSomaha S Afnca 0 anda 1985

19983 0504

19B8 9S7 19BB Jan Fe6 lIlIar lpr lIlIay Jun lui lug 1 nt

T-Statistic - - -IMoael Coefficient 23253 13102 20815 T -Statistic 0596 0332 0532 MoaelOS Coefficient 54877 -5562 -30415 -26495 -32242 5705 0845 68066 T-Statistic - 1020 -0109 -0601 -0519 -0632 0113 0016 1265 ~oaeI4 Coefficient T -Statistic - -

)ept Vet NaY III IVIIA IVIII IIA )IV vas 1() AI(IS l~oa~ll Coefficient T-Statistic -

-- -- -

--

--

--

--

707 0990 0990

IMOoI Coefficient - - - - - 707 0990 0990 T-Statistic - - - - - -IMoaelos Coefficient -42859 11523 -29712 - - - - - 707 0991 0990 T-Statistic -0796 0212 -0547 - - - -IMOolI4 Coefficient - - 35134 -14445 1178 48530 -2134 707 0990 0990 T -Statistic - - - 0939 -0396 0032 1260 -0055

Notet represents the dollar value of domestic assets erepresents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JfF reprecents January and February MfA represents March and April MfJ represents MayfJune JfA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared 4

Figure 05 GDP-Adjusted Regression Results

~ons am A -e I a 1)tXPOns 1(11 0 anglaa tsraZIl 111 lraquoamOla Iraquol1ana Iraquouyan ~O~~11

5862CoeffiCient T-Statistic 0385

0000 -0171

-13370 -0183

0020 0000 0079 -0013

0997 216677

- - - - -- - - - - -

moael ~ Coefficient 2356 -0000 -13846 0026 0000 0997 - - - - - -T-Statislic 0071 -0167 -0189 0102 -0012 214540 - - - - - -moael) Coefficient 771 0788 0000 11312 0547 0004 0352 -7719098-7683484-7717789-7708228-7709456-770521 T -Statistic 18395 0056 0046 2626 0715 9975 -16810 -17570 -17614 -18346 -17997 -18346

~~~nt 7793307 -0000 69309 0541 0003 0345 -7776315-7748140-7831557 -7795274-7780083-779193 T -Statistic 18416 -0072 0274 2564 0639 9689 -16709 -17614 -17620 -18406 -18019 -18405 ~O~~II Coefficient 7772057 T -Statistic 18212

-0000 -0040

67664 0266

0570 0004 2682 0747

0346 9663

-7770991-7746069-7819159-7783380-7771114-778070 -16565 -17510 -17489 -18256 -17865 -18257

IMoael)Coefficient 7802352 -0000 62881 0562 0004 0343 -7814868-7781648-7853786-7820284-7811477-781778 T -Statistic 18368 -0007 0248 2647 0720 9613 -16734 -17658 -17628 -18418 -18039 -18420

Hungary Ireland Jamaica Kenya Nepal NlgerlaPhmppl S Africa Somaha Uganda 985 ~O~ell Coefficient T-Statistic IMoae ~ Coefficient T -Statistic

4344 0110

~~~int-7711270-7711117-7705081-7708628-771 0435-7710690-7708970-771 0624-7705774-7699931 TmiddotStatistic -18109 -18352 -18343 -18352 -18351 -18301 -18319 -18223 -18267 -17190

1~C~nt-7791625-7795 155-7792825-7792342-7793784-7802 716-7799858-7807111-7776 720-7778288 T-Statistic -18173 -18414 -18401 -18413 -18413 -18354 -18374 -18268 -18329 -17249

-8722 -0250

IMoaelO Coefficient-7769000-7783595-7780779-7780636-7782193-7790764-7787692-7794987-7765482-7766654 T-Statistic -17995 -18263 -18252 -18263 -18262 -18207 -18225 -18124 -18178 -17099

-3506 -0095

loa~lo Coefficient-7801636-7820663-7817660-7817 781-7819339-7827233-7824159-78311 03-7803668-7812749 TmiddotStatistic -18152 -18426 -18413 -18426 -18425 -18366 -18385 middot18280 -18346 -17288

-6470 -0176

5

Figure 06 GDP-Adjusted Regression Results (contd)

985 987 988 Jan FeB VIar ~ r VIay Jun Jul ~u

I~O~~H1 Coefficient T-Statistic MO~~It Coefficient 7117 T-Statistic 0186

-2319 -0060

6885 0178

~oael3 Coefficient T -Statistic ~O~~14 Coefficient -15443 T-Statistic -0457

26149 0803

-6601 -0205

MO~~I~ Coefficient -15943 T-Statistic -0451

25332 0746

-7131 -0213

74901 1678

20520 0490

-3344 -0080

-11626 -0277

-16430 -0391

-5512 -0133

-6781 -0155

65909 1512

IMO~~Ib Coefficient -16270 T -Statistic -0461

24949 0735

-8096 -0242

~ep Vc lOY Jt MIA MJ JA )U UDS K) AK) IMoael1 Coefficient T -Statistic

--

--

--

--

--

--

--

--

701 0990 0990

IMoaelt Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0990 0990

l~oael3 Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0993 0993

I~O~~14 Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0993 0993

MO~~I ~ Coefficient T -Statistic

2993 0069

19756 0450

-16633 -0379

--

--

--

--

--

701 0993 0993

Moaelb Coefficient T -Statistic

--

--

--

52279 1682

0532 0018

-2984 -0099

37655 1210

19337 0621

701 0993 0993

Notel represents the dollar value of GOP-adjusted domestic assets e-represents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JIF reprecents January and February MIA represents March and April MIJ represents MayJune JIA represents July and August SO represents September and October RS represents R-squared ARS represents Adjusted R-squared

6

Figure 07 Population-Adjusted Regression Results

onstant A e JI + a + IJXP0rtS KflO ~l9laaesrnuaz 11 iamOl3 illana buyan 0I~Il

0000Coefficient -3446 T-Slatislic Q225 1770

-100131 0011 -0251 -1143 0131 middot1417

0989 - - - -182456 - - - - - -

moue I L-Coefficient -17080 0000 T-Statistic -0503 1760

-100743 0005 -0248 -1145 0060 -1396

0989 - - - - -181385 - - - - - -

moae Coefficien7630838 0000 T-Statistic 17618 2372

-233437 0371 -0309 -0855 4725 -0876

0336 -7638907 -754796476552127621035763559-gt773922 9386 -17627 -17489 -16969 -17529 -17627 -18116

0C~14 Coefficien771 0438 0000 T -Statistic 17607 2342

-192329 0373 -0346 -0678 4651 -0940

0329 -7721088 middot762057Q775976amp7706829771760sect782514 9118 -17668 -17538 -16939 -17557 -17669 -18161

loCI b Coefficien7701697 0000 T-Statistic 17397 2174

-181813 0373 -0197 -0638 4638 middot0525

0329 -7727929 middot7633454776870277148557725089782867 9050 -17537 -17424 -16835 middot17432 -17539 -18023

I0I~1 1)Coefficien7715596 0000 T-Stalistic 17520 2204

-189086 0373 -0226 -0665 4645 -0604

0327 -7746692 -7651603778382877329157743732784762 9046 -17656 -17541 -16933 -17547 -17658 -18149

Hungary Ireland Jamaca Kenya Nepal Ngena pnmpprneil AfncasomauaOganda 1985

I~~~~nt T -Statistic Imoa_e ~ Coefficient 16380 T-Statistic 0414 M0I~ICoefficient791322177842417849 718-763188()76343787618233 -7659489 -774217676289727669301 T-Statistic -18248 -17724 -17707 -17595 -17598 middot17458 -17712 -17983 -17509 -16682

~e~~nt799553278569257735527-7715325-7717 7097707624 -7749619 -7834412769988Q7750340 2093 T-Slatistic -18305 -17756 -17741 -17631 -17636 -17475 -17743 -18012 -17549 -16737 0060 lVIoaelb Coefficient7974 9037900 7447744 16()7722857-77247847715806 -7754439 -783957677095827763339 8497 T-Statistic -18109 -17706 -17617 -17503 -17506 -17353 -17609 -17885 -17426 -16630 0228 M0I~It Coefficient799053sect791158477619547741315-77433587733345 -7772784 -785695677284717779725 6575 T-Statislic -18236 -17804 -17733 -17621 -17624 -17465 -17727 -18003 -17546 -16749 0178

7

Figure 08 Popl ulation-Adj usted Regression Results (cont d)

98B 987 988 Jan FeB lIIIar ZSpr lIIIay Jun Jul ZSug IMouel1 Coefficient T-Statistic - -MOUel Coefficient 17029 8982 18636 T-Statistic 0437 0228 0477 -1Ideguel)Coefficient T-Statistic - - -~O~~14 Coefficient -17208 T-Statistic -0506

28688 0872

-2661 -0082

Mouelgt Coefficient -14649 29755 -2995 58202 36993 8631 -0309 -23164 5806 -0326 70540 T -Statistic -0410 0863 -0089 1260 0856 0202 -0007 -0536 0136 -0007 1561 MOUel1l Coefficient -15465 29141 -3612 T -Statistic -0433 0847 -0107

e c ov s

707 0990 0990

707 0990 0990

707 0994 0993

707 0994 0993

24336 -11954 707 0994 0993 0536 -0263

51669 9792 -2857 40751 23085 707 0994 0993 1602 0316 -0092 1264 0718

Note represents the dollar value of population-adjusted domestic assets erepresents the official real exchange rate

(i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JF reprecents January and February MIA represents March and April MIJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared

8

Figure 0 9- ABampC

Figure A

~ Figure B A

oL~_~~~

Figure C

50000 ~ ~

1+l-I-H+i+H-+H-1+I+1++-1+I+1+I+++-+i+4tttl

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Figure 8

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Figure 03 3

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Nepal Black Official and Premium Exch

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Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

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Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

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Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Figure 05 GDP-Adjusted Regression Results

~ons am A -e I a 1)tXPOns 1(11 0 anglaa tsraZIl 111 lraquoamOla Iraquol1ana Iraquouyan ~O~~11

5862CoeffiCient T-Statistic 0385

0000 -0171

-13370 -0183

0020 0000 0079 -0013

0997 216677

- - - - -- - - - - -

moael ~ Coefficient 2356 -0000 -13846 0026 0000 0997 - - - - - -T-Statislic 0071 -0167 -0189 0102 -0012 214540 - - - - - -moael) Coefficient 771 0788 0000 11312 0547 0004 0352 -7719098-7683484-7717789-7708228-7709456-770521 T -Statistic 18395 0056 0046 2626 0715 9975 -16810 -17570 -17614 -18346 -17997 -18346

~~~nt 7793307 -0000 69309 0541 0003 0345 -7776315-7748140-7831557 -7795274-7780083-779193 T -Statistic 18416 -0072 0274 2564 0639 9689 -16709 -17614 -17620 -18406 -18019 -18405 ~O~~II Coefficient 7772057 T -Statistic 18212

-0000 -0040

67664 0266

0570 0004 2682 0747

0346 9663

-7770991-7746069-7819159-7783380-7771114-778070 -16565 -17510 -17489 -18256 -17865 -18257

IMoael)Coefficient 7802352 -0000 62881 0562 0004 0343 -7814868-7781648-7853786-7820284-7811477-781778 T -Statistic 18368 -0007 0248 2647 0720 9613 -16734 -17658 -17628 -18418 -18039 -18420

Hungary Ireland Jamaica Kenya Nepal NlgerlaPhmppl S Africa Somaha Uganda 985 ~O~ell Coefficient T-Statistic IMoae ~ Coefficient T -Statistic

4344 0110

~~~int-7711270-7711117-7705081-7708628-771 0435-7710690-7708970-771 0624-7705774-7699931 TmiddotStatistic -18109 -18352 -18343 -18352 -18351 -18301 -18319 -18223 -18267 -17190

1~C~nt-7791625-7795 155-7792825-7792342-7793784-7802 716-7799858-7807111-7776 720-7778288 T-Statistic -18173 -18414 -18401 -18413 -18413 -18354 -18374 -18268 -18329 -17249

-8722 -0250

IMoaelO Coefficient-7769000-7783595-7780779-7780636-7782193-7790764-7787692-7794987-7765482-7766654 T-Statistic -17995 -18263 -18252 -18263 -18262 -18207 -18225 -18124 -18178 -17099

-3506 -0095

loa~lo Coefficient-7801636-7820663-7817660-7817 781-7819339-7827233-7824159-78311 03-7803668-7812749 TmiddotStatistic -18152 -18426 -18413 -18426 -18425 -18366 -18385 middot18280 -18346 -17288

-6470 -0176

5

Figure 06 GDP-Adjusted Regression Results (contd)

985 987 988 Jan FeB VIar ~ r VIay Jun Jul ~u

I~O~~H1 Coefficient T-Statistic MO~~It Coefficient 7117 T-Statistic 0186

-2319 -0060

6885 0178

~oael3 Coefficient T -Statistic ~O~~14 Coefficient -15443 T-Statistic -0457

26149 0803

-6601 -0205

MO~~I~ Coefficient -15943 T-Statistic -0451

25332 0746

-7131 -0213

74901 1678

20520 0490

-3344 -0080

-11626 -0277

-16430 -0391

-5512 -0133

-6781 -0155

65909 1512

IMO~~Ib Coefficient -16270 T -Statistic -0461

24949 0735

-8096 -0242

~ep Vc lOY Jt MIA MJ JA )U UDS K) AK) IMoael1 Coefficient T -Statistic

--

--

--

--

--

--

--

--

701 0990 0990

IMoaelt Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0990 0990

l~oael3 Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0993 0993

I~O~~14 Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0993 0993

MO~~I ~ Coefficient T -Statistic

2993 0069

19756 0450

-16633 -0379

--

--

--

--

--

701 0993 0993

Moaelb Coefficient T -Statistic

--

--

--

52279 1682

0532 0018

-2984 -0099

37655 1210

19337 0621

701 0993 0993

Notel represents the dollar value of GOP-adjusted domestic assets e-represents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JIF reprecents January and February MIA represents March and April MIJ represents MayJune JIA represents July and August SO represents September and October RS represents R-squared ARS represents Adjusted R-squared

6

Figure 07 Population-Adjusted Regression Results

onstant A e JI + a + IJXP0rtS KflO ~l9laaesrnuaz 11 iamOl3 illana buyan 0I~Il

0000Coefficient -3446 T-Slatislic Q225 1770

-100131 0011 -0251 -1143 0131 middot1417

0989 - - - -182456 - - - - - -

moue I L-Coefficient -17080 0000 T-Statistic -0503 1760

-100743 0005 -0248 -1145 0060 -1396

0989 - - - - -181385 - - - - - -

moae Coefficien7630838 0000 T-Statistic 17618 2372

-233437 0371 -0309 -0855 4725 -0876

0336 -7638907 -754796476552127621035763559-gt773922 9386 -17627 -17489 -16969 -17529 -17627 -18116

0C~14 Coefficien771 0438 0000 T -Statistic 17607 2342

-192329 0373 -0346 -0678 4651 -0940

0329 -7721088 middot762057Q775976amp7706829771760sect782514 9118 -17668 -17538 -16939 -17557 -17669 -18161

loCI b Coefficien7701697 0000 T-Statistic 17397 2174

-181813 0373 -0197 -0638 4638 middot0525

0329 -7727929 middot7633454776870277148557725089782867 9050 -17537 -17424 -16835 middot17432 -17539 -18023

I0I~1 1)Coefficien7715596 0000 T-Stalistic 17520 2204

-189086 0373 -0226 -0665 4645 -0604

0327 -7746692 -7651603778382877329157743732784762 9046 -17656 -17541 -16933 -17547 -17658 -18149

Hungary Ireland Jamaca Kenya Nepal Ngena pnmpprneil AfncasomauaOganda 1985

I~~~~nt T -Statistic Imoa_e ~ Coefficient 16380 T-Statistic 0414 M0I~ICoefficient791322177842417849 718-763188()76343787618233 -7659489 -774217676289727669301 T-Statistic -18248 -17724 -17707 -17595 -17598 middot17458 -17712 -17983 -17509 -16682

~e~~nt799553278569257735527-7715325-7717 7097707624 -7749619 -7834412769988Q7750340 2093 T-Slatistic -18305 -17756 -17741 -17631 -17636 -17475 -17743 -18012 -17549 -16737 0060 lVIoaelb Coefficient7974 9037900 7447744 16()7722857-77247847715806 -7754439 -783957677095827763339 8497 T-Statistic -18109 -17706 -17617 -17503 -17506 -17353 -17609 -17885 -17426 -16630 0228 M0I~It Coefficient799053sect791158477619547741315-77433587733345 -7772784 -785695677284717779725 6575 T-Statislic -18236 -17804 -17733 -17621 -17624 -17465 -17727 -18003 -17546 -16749 0178

7

Figure 08 Popl ulation-Adj usted Regression Results (cont d)

98B 987 988 Jan FeB lIIIar ZSpr lIIIay Jun Jul ZSug IMouel1 Coefficient T-Statistic - -MOUel Coefficient 17029 8982 18636 T-Statistic 0437 0228 0477 -1Ideguel)Coefficient T-Statistic - - -~O~~14 Coefficient -17208 T-Statistic -0506

28688 0872

-2661 -0082

Mouelgt Coefficient -14649 29755 -2995 58202 36993 8631 -0309 -23164 5806 -0326 70540 T -Statistic -0410 0863 -0089 1260 0856 0202 -0007 -0536 0136 -0007 1561 MOUel1l Coefficient -15465 29141 -3612 T -Statistic -0433 0847 -0107

e c ov s

707 0990 0990

707 0990 0990

707 0994 0993

707 0994 0993

24336 -11954 707 0994 0993 0536 -0263

51669 9792 -2857 40751 23085 707 0994 0993 1602 0316 -0092 1264 0718

Note represents the dollar value of population-adjusted domestic assets erepresents the official real exchange rate

(i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JF reprecents January and February MIA represents March and April MIJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared

8

Figure 0 9- ABampC

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200 __ Premium Figure 1 pound 300 150 L _~________----l

~ 200~ 100r middotmiddotmiddot 50100+

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~---~ ---~~--- ------ 0 Premiu

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Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

- - - Premium Figur

Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

2000 t __-- +2000 o FiFI_FITtrTl=nn--rrrr--IIIllllimiddot1111 11 0 ~ ~ ~ ~ ~ N ~ re ~ ~ ~ ~ ~ ~

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Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Figure 06 GDP-Adjusted Regression Results (contd)

985 987 988 Jan FeB VIar ~ r VIay Jun Jul ~u

I~O~~H1 Coefficient T-Statistic MO~~It Coefficient 7117 T-Statistic 0186

-2319 -0060

6885 0178

~oael3 Coefficient T -Statistic ~O~~14 Coefficient -15443 T-Statistic -0457

26149 0803

-6601 -0205

MO~~I~ Coefficient -15943 T-Statistic -0451

25332 0746

-7131 -0213

74901 1678

20520 0490

-3344 -0080

-11626 -0277

-16430 -0391

-5512 -0133

-6781 -0155

65909 1512

IMO~~Ib Coefficient -16270 T -Statistic -0461

24949 0735

-8096 -0242

~ep Vc lOY Jt MIA MJ JA )U UDS K) AK) IMoael1 Coefficient T -Statistic

--

--

--

--

--

--

--

--

701 0990 0990

IMoaelt Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0990 0990

l~oael3 Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0993 0993

I~O~~14 Coefficient T-Statistic

--

--

--

--

--

--

--

--

701 0993 0993

MO~~I ~ Coefficient T -Statistic

2993 0069

19756 0450

-16633 -0379

--

--

--

--

--

701 0993 0993

Moaelb Coefficient T -Statistic

--

--

--

52279 1682

0532 0018

-2984 -0099

37655 1210

19337 0621

701 0993 0993

Notel represents the dollar value of GOP-adjusted domestic assets e-represents the official real exchange rate (i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JIF reprecents January and February MIA represents March and April MIJ represents MayJune JIA represents July and August SO represents September and October RS represents R-squared ARS represents Adjusted R-squared

6

Figure 07 Population-Adjusted Regression Results

onstant A e JI + a + IJXP0rtS KflO ~l9laaesrnuaz 11 iamOl3 illana buyan 0I~Il

0000Coefficient -3446 T-Slatislic Q225 1770

-100131 0011 -0251 -1143 0131 middot1417

0989 - - - -182456 - - - - - -

moue I L-Coefficient -17080 0000 T-Statistic -0503 1760

-100743 0005 -0248 -1145 0060 -1396

0989 - - - - -181385 - - - - - -

moae Coefficien7630838 0000 T-Statistic 17618 2372

-233437 0371 -0309 -0855 4725 -0876

0336 -7638907 -754796476552127621035763559-gt773922 9386 -17627 -17489 -16969 -17529 -17627 -18116

0C~14 Coefficien771 0438 0000 T -Statistic 17607 2342

-192329 0373 -0346 -0678 4651 -0940

0329 -7721088 middot762057Q775976amp7706829771760sect782514 9118 -17668 -17538 -16939 -17557 -17669 -18161

loCI b Coefficien7701697 0000 T-Statistic 17397 2174

-181813 0373 -0197 -0638 4638 middot0525

0329 -7727929 middot7633454776870277148557725089782867 9050 -17537 -17424 -16835 middot17432 -17539 -18023

I0I~1 1)Coefficien7715596 0000 T-Stalistic 17520 2204

-189086 0373 -0226 -0665 4645 -0604

0327 -7746692 -7651603778382877329157743732784762 9046 -17656 -17541 -16933 -17547 -17658 -18149

Hungary Ireland Jamaca Kenya Nepal Ngena pnmpprneil AfncasomauaOganda 1985

I~~~~nt T -Statistic Imoa_e ~ Coefficient 16380 T-Statistic 0414 M0I~ICoefficient791322177842417849 718-763188()76343787618233 -7659489 -774217676289727669301 T-Statistic -18248 -17724 -17707 -17595 -17598 middot17458 -17712 -17983 -17509 -16682

~e~~nt799553278569257735527-7715325-7717 7097707624 -7749619 -7834412769988Q7750340 2093 T-Slatistic -18305 -17756 -17741 -17631 -17636 -17475 -17743 -18012 -17549 -16737 0060 lVIoaelb Coefficient7974 9037900 7447744 16()7722857-77247847715806 -7754439 -783957677095827763339 8497 T-Statistic -18109 -17706 -17617 -17503 -17506 -17353 -17609 -17885 -17426 -16630 0228 M0I~It Coefficient799053sect791158477619547741315-77433587733345 -7772784 -785695677284717779725 6575 T-Statislic -18236 -17804 -17733 -17621 -17624 -17465 -17727 -18003 -17546 -16749 0178

7

Figure 08 Popl ulation-Adj usted Regression Results (cont d)

98B 987 988 Jan FeB lIIIar ZSpr lIIIay Jun Jul ZSug IMouel1 Coefficient T-Statistic - -MOUel Coefficient 17029 8982 18636 T-Statistic 0437 0228 0477 -1Ideguel)Coefficient T-Statistic - - -~O~~14 Coefficient -17208 T-Statistic -0506

28688 0872

-2661 -0082

Mouelgt Coefficient -14649 29755 -2995 58202 36993 8631 -0309 -23164 5806 -0326 70540 T -Statistic -0410 0863 -0089 1260 0856 0202 -0007 -0536 0136 -0007 1561 MOUel1l Coefficient -15465 29141 -3612 T -Statistic -0433 0847 -0107

e c ov s

707 0990 0990

707 0990 0990

707 0994 0993

707 0994 0993

24336 -11954 707 0994 0993 0536 -0263

51669 9792 -2857 40751 23085 707 0994 0993 1602 0316 -0092 1264 0718

Note represents the dollar value of population-adjusted domestic assets erepresents the official real exchange rate

(i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JF reprecents January and February MIA represents March and April MIJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared

8

Figure 0 9- ABampC

Figure A

~ Figure B A

oL~_~~~

Figure C

50000 ~ ~

1+l-I-H+i+H-+H-1+I+1++-1+I+1+I+++-+i+4tttl

Bangladesh Black Official and Premium Exc

Brazil Black Ottical and Premium Exch

30000Ur----------------r 50000 I)

$ 25000 _----0 ~

-50000 ___ __ _~ 20000 -100000 - - - Blac~ Market Exchange I - - - - middotOfficlal Exchange Rate I Figure 2~ 15000

-150000 --Premium ~ 10000 c

-200000 w -250000

__1t- -300000 1)(J)C)~N~~~~t~~~

Tim

Fiji Black Official and Premium Excha

16 - ~01 Premiu

- =14 -02 0 12 03

CI) 1 bullbullbull __ n _ ___ 04[- -- - -BIllCk Market EXChange l ~ 08 - -05 --Official Exchange Rate Figure 3 fi 06 jbullbull _ bull -06 - - - Premium In 04 1_ -07 -~-- _~_~___~ ____J

0 802 1 - - -09 0~~+I+H+H~0+~H+H~H++H~tt++H++H~H-1

LO Ol I) (J)N N

Tim

140~ -~-~- ---~- 1100 V 90

120~ tmiddot i 1 I 80 100 ~ bull -~ 70u If ~ _ ~

amp 80t t__ - -- 60 c f -- 50~ t fi 60 T l I e-40 gtlt I ~ 30

~E 20iw 20 I

o ~lllllllll 111111111111111111+1 I II II IIIIII~ ~O ~~~~~~~~~re~~~~~~~~

Tim

Premiu

- ~ BraCK Market Excha I Rate

--Official Exchange R Figure 1

- - - Premium I

Figure 01

Gambia Black Official and Premium Exch

Premiu

bullbullbullbullBlack Market Exchange middot1middot

--Official Exchange Rate -------shy

Figure 4 1-==-_~remi~~______ ~

Ghana Black Official and Premium Exch

2501 I i 11 l

m 200yen 1_ I bullbull I

100

_ V 150

100middotmiddot

80 1- 60

~ 40

50-1----shy J 20

350c----------middotmiddotmiddot--middotmiddotmiddot--middotmiddot---middotmiddotmiddot----middotmiddotmiddot 300 I 1 ~ Ggt

140

120 Premiu

----_

c ~ u gtltW

-- Black Market EXChang

Jmiddot1 --OffiCi~1 Exchange Rate shy - - Premium

-shy-shy _-

Guyana Black Official and Premium Exch

0gt N

Premiu

Figure 5

Figure 6

Tim

Figure 02 2

----------

Hungary Black Official and Premium Exch

90T-------------------------~--~30 (I) 80 Premiu

t tmiddotmiddotmiddot f 25~ 70 bullbullbull bull 10 60 bull bull IIII

CI 50 40

~ 30

I shy

IA

ri

w

++++++++++H+fH+H+H+H+H+f++O

16

14 (I)

Jl IG 12 0 1

08

06 shyJ 0204 - I o02 Ia

V II

+i+H+4--H-t-H+H+f-H++++f++t+t+++H--H-t-H+H-+t+t++++ji+++ -02 ~ ID m M ~ N ~ ~ ~ ~ ~ ~ ~ ~

Tim

T 20 ~BlackMarket Exchange

1 15 Official Exchange Rate -shy

- - - Premium10 --------~ _--1

5

ID m M ~ ~ ID m M ~ ~ ID m M ~ ~ N N N M M ~ ~ ~ ID

r---------------1b~----------~----- ---shy

Ireland Black Official and Premium Exch

-bull--c----bullbull----r 12 Premiu ~

II

1 _ I I I 08I I -J

06[-- - middotBlack Market Exchange i

I 04 --Official Exchange Rate ___ Premium

Jamaica Black Official and Premium Exch

8 2

11 7 ~ bullrgt ~~ ~ J ~~CI l - i 4 1 I ----I __ - -- 1 5 3 I I I 08 gtlt 2 I 1 06W v 04

1 ~ t 002

O+++++++++++++-H++IIIIIIIIIIIIIIIIIIIIIIII ~~~oMIDmNIDro~~~oMIDmN

~~~~NNNMMM~~~~ID

Tim

Premiu

Black Market Exchange --Official Exchange Rate - - - Premium

Figure 7

Figure 8

Figure 9

Figure 03 3

Kenya Black Official and Premium Exch

1~~~BlaCkMarkefExchange i --Official Exchange Rate i

- Premium Figure 1

LO en ~ ~ ~ try ~ ~ ~ lri Tim

Nepal Black Official and Premium Exch

i ~I--middot--middotmiddot--middot--middot~-middot--middot--middot- t~I~ Premiu

l ~g i~-middotl +10 l--=--=-~ -Black MarkefEXChangel r 25 bull ___ I I I --Official Exchange Rate Figure 1 1 20 bull - - I J t 5 - - - Premium ~ 15 - I - - -_________shy

w _J - 0 5 o ~

LO en M ~ N ~ ~ ~ try ~ ~

Tim

Nigeria Black Official and Premium Exch

Premiu

Figure 04 4

25 III

Jl 20cu n amp 15 c ~ 10 ~ w 5

Phillipines Black Official and Premium Exch

I I I

II t

III I I I - I - 1

t1--shy

~ on en CI CI

Tim

4 Premlu

3

2 ~= Black Market Exchange --Official Exchange Rate - - - Premium Figure 1

0

-1

Somalia Black Official and Premium Exch

1450 P 400 remlu 7 J~~~j 350~ 600

CI) 500 1 300 ~~Black Market Exchange Cl 250 bull --Official Exchange Rate ~ 400t

200 __ Premium Figure 1 pound 300 150 L _~________----l

~ 200~ 100r middotmiddotmiddot 50100+

O~ImiddotIIIIIIII H-j-+++++I 111111111111111+--1 deg ~ on en ~ ~ N ~ ~ ~ ~ ~ ~ ~ ~

Tim

South Africa Black Official and Premium Exc

~---~ ---~~--- ------ 0 Premiu

-05

-1 r - Black MarketExchange _-Official Exchange Rate

-15 1 - - - Premium Figure 1

-2

+++H+t+H+H++++t+H--+jbull ++++t+H+H++++++++++ff- -25 ~ ~ on en M ~ ~ on en M ~ CI CI CI M M V V V on

Tim

Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

- - - Premium Figur

Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

2000 t __-- +2000 o FiFI_FITtrTl=nn--rrrr--IIIllllimiddot1111 11 0 ~ ~ ~ ~ ~ N ~ re ~ ~ ~ ~ ~ ~

Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Figure 07 Population-Adjusted Regression Results

onstant A e JI + a + IJXP0rtS KflO ~l9laaesrnuaz 11 iamOl3 illana buyan 0I~Il

0000Coefficient -3446 T-Slatislic Q225 1770

-100131 0011 -0251 -1143 0131 middot1417

0989 - - - -182456 - - - - - -

moue I L-Coefficient -17080 0000 T-Statistic -0503 1760

-100743 0005 -0248 -1145 0060 -1396

0989 - - - - -181385 - - - - - -

moae Coefficien7630838 0000 T-Statistic 17618 2372

-233437 0371 -0309 -0855 4725 -0876

0336 -7638907 -754796476552127621035763559-gt773922 9386 -17627 -17489 -16969 -17529 -17627 -18116

0C~14 Coefficien771 0438 0000 T -Statistic 17607 2342

-192329 0373 -0346 -0678 4651 -0940

0329 -7721088 middot762057Q775976amp7706829771760sect782514 9118 -17668 -17538 -16939 -17557 -17669 -18161

loCI b Coefficien7701697 0000 T-Statistic 17397 2174

-181813 0373 -0197 -0638 4638 middot0525

0329 -7727929 middot7633454776870277148557725089782867 9050 -17537 -17424 -16835 middot17432 -17539 -18023

I0I~1 1)Coefficien7715596 0000 T-Stalistic 17520 2204

-189086 0373 -0226 -0665 4645 -0604

0327 -7746692 -7651603778382877329157743732784762 9046 -17656 -17541 -16933 -17547 -17658 -18149

Hungary Ireland Jamaca Kenya Nepal Ngena pnmpprneil AfncasomauaOganda 1985

I~~~~nt T -Statistic Imoa_e ~ Coefficient 16380 T-Statistic 0414 M0I~ICoefficient791322177842417849 718-763188()76343787618233 -7659489 -774217676289727669301 T-Statistic -18248 -17724 -17707 -17595 -17598 middot17458 -17712 -17983 -17509 -16682

~e~~nt799553278569257735527-7715325-7717 7097707624 -7749619 -7834412769988Q7750340 2093 T-Slatistic -18305 -17756 -17741 -17631 -17636 -17475 -17743 -18012 -17549 -16737 0060 lVIoaelb Coefficient7974 9037900 7447744 16()7722857-77247847715806 -7754439 -783957677095827763339 8497 T-Statistic -18109 -17706 -17617 -17503 -17506 -17353 -17609 -17885 -17426 -16630 0228 M0I~It Coefficient799053sect791158477619547741315-77433587733345 -7772784 -785695677284717779725 6575 T-Statislic -18236 -17804 -17733 -17621 -17624 -17465 -17727 -18003 -17546 -16749 0178

7

Figure 08 Popl ulation-Adj usted Regression Results (cont d)

98B 987 988 Jan FeB lIIIar ZSpr lIIIay Jun Jul ZSug IMouel1 Coefficient T-Statistic - -MOUel Coefficient 17029 8982 18636 T-Statistic 0437 0228 0477 -1Ideguel)Coefficient T-Statistic - - -~O~~14 Coefficient -17208 T-Statistic -0506

28688 0872

-2661 -0082

Mouelgt Coefficient -14649 29755 -2995 58202 36993 8631 -0309 -23164 5806 -0326 70540 T -Statistic -0410 0863 -0089 1260 0856 0202 -0007 -0536 0136 -0007 1561 MOUel1l Coefficient -15465 29141 -3612 T -Statistic -0433 0847 -0107

e c ov s

707 0990 0990

707 0990 0990

707 0994 0993

707 0994 0993

24336 -11954 707 0994 0993 0536 -0263

51669 9792 -2857 40751 23085 707 0994 0993 1602 0316 -0092 1264 0718

Note represents the dollar value of population-adjusted domestic assets erepresents the official real exchange rate

(i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JF reprecents January and February MIA represents March and April MIJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared

8

Figure 0 9- ABampC

Figure A

~ Figure B A

oL~_~~~

Figure C

50000 ~ ~

1+l-I-H+i+H-+H-1+I+1++-1+I+1+I+++-+i+4tttl

Bangladesh Black Official and Premium Exc

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Tim

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Figure 9

Figure 03 3

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LO en ~ ~ ~ try ~ ~ ~ lri Tim

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200 __ Premium Figure 1 pound 300 150 L _~________----l

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Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

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Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Figure 08 Popl ulation-Adj usted Regression Results (cont d)

98B 987 988 Jan FeB lIIIar ZSpr lIIIay Jun Jul ZSug IMouel1 Coefficient T-Statistic - -MOUel Coefficient 17029 8982 18636 T-Statistic 0437 0228 0477 -1Ideguel)Coefficient T-Statistic - - -~O~~14 Coefficient -17208 T-Statistic -0506

28688 0872

-2661 -0082

Mouelgt Coefficient -14649 29755 -2995 58202 36993 8631 -0309 -23164 5806 -0326 70540 T -Statistic -0410 0863 -0089 1260 0856 0202 -0007 -0536 0136 -0007 1561 MOUel1l Coefficient -15465 29141 -3612 T -Statistic -0433 0847 -0107

e c ov s

707 0990 0990

707 0990 0990

707 0994 0993

707 0994 0993

24336 -11954 707 0994 0993 0536 -0263

51669 9792 -2857 40751 23085 707 0994 0993 1602 0316 -0092 1264 0718

Note represents the dollar value of population-adjusted domestic assets erepresents the official real exchange rate

(i + d + i) represents the official depreciation-adjusted interest rate differential Rho represents the first order difference in the black market premium Jan represents January Feb represents February and so forth through November JF reprecents January and February MIA represents March and April MIJ represents MayJune JA represents July and August SIO represents September and October RS represents R-squared ARS represents Adjusted R-squared

8

Figure 0 9- ABampC

Figure A

~ Figure B A

oL~_~~~

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50000 ~ ~

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Bangladesh Black Official and Premium Exc

Brazil Black Ottical and Premium Exch

30000Ur----------------r 50000 I)

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Tim

Fiji Black Official and Premium Excha

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--Official Exchange R Figure 1

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Figure 01

Gambia Black Official and Premium Exch

Premiu

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--Official Exchange Rate -------shy

Figure 4 1-==-_~remi~~______ ~

Ghana Black Official and Premium Exch

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100

_ V 150

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80 1- 60

~ 40

50-1----shy J 20

350c----------middotmiddotmiddot--middotmiddotmiddot--middotmiddot---middotmiddotmiddot----middotmiddotmiddot 300 I 1 ~ Ggt

140

120 Premiu

----_

c ~ u gtltW

-- Black Market EXChang

Jmiddot1 --OffiCi~1 Exchange Rate shy - - Premium

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0gt N

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Figure 5

Figure 6

Tim

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----------

Hungary Black Official and Premium Exch

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CI 50 40

~ 30

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Tim

T 20 ~BlackMarket Exchange

1 15 Official Exchange Rate -shy

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5

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r---------------1b~----------~----- ---shy

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-bull--c----bullbull----r 12 Premiu ~

II

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Figure 8

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Figure 03 3

Kenya Black Official and Premium Exch

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LO en ~ ~ ~ try ~ ~ ~ lri Tim

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Tim

Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

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Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Figure 0 9- ABampC

Figure A

~ Figure B A

oL~_~~~

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50000 ~ ~

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Brazil Black Ottical and Premium Exch

30000Ur----------------r 50000 I)

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Tim

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Tim

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Gambia Black Official and Premium Exch

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Figure 4 1-==-_~remi~~______ ~

Ghana Black Official and Premium Exch

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Tim

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----------

Hungary Black Official and Premium Exch

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T 20 ~BlackMarket Exchange

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Figure 03 3

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Uganda Black Official and Premium Exchange Rates

Premium

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Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

50000 ~ ~

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Gambia Black Official and Premium Exch

Premiu

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Tim

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Ireland Black Official and Premium Exch

-bull--c----bullbull----r 12 Premiu ~

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1 _ I I I 08I I -J

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Jamaica Black Official and Premium Exch

8 2

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Figure 7

Figure 8

Figure 9

Figure 03 3

Kenya Black Official and Premium Exch

1~~~BlaCkMarkefExchange i --Official Exchange Rate i

- Premium Figure 1

LO en ~ ~ ~ try ~ ~ ~ lri Tim

Nepal Black Official and Premium Exch

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25 III

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4 Premlu

3

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~ 200~ 100r middotmiddotmiddot 50100+

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Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

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Yugoslavia Black Official and Premium Exchange Rates

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Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Gambia Black Official and Premium Exch

Premiu

bullbullbullbullBlack Market Exchange middot1middot

--Official Exchange Rate -------shy

Figure 4 1-==-_~remi~~______ ~

Ghana Black Official and Premium Exch

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140

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Tim

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Tim

T 20 ~BlackMarket Exchange

1 15 Official Exchange Rate -shy

- - - Premium10 --------~ _--1

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r---------------1b~----------~----- ---shy

Ireland Black Official and Premium Exch

-bull--c----bullbull----r 12 Premiu ~

II

1 _ I I I 08I I -J

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Figure 03 3

Kenya Black Official and Premium Exch

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LO en ~ ~ ~ try ~ ~ ~ lri Tim

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Tim

4 Premlu

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1450 P 400 remlu 7 J~~~j 350~ 600

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200 __ Premium Figure 1 pound 300 150 L _~________----l

~ 200~ 100r middotmiddotmiddot 50100+

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Tim

South Africa Black Official and Premium Exc

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Tim

Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

- - - Premium Figur

Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

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Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

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Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

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Yugoslavia Black Official and Premium Exchange Rates

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Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Kenya Black Official and Premium Exch

1~~~BlaCkMarkefExchange i --Official Exchange Rate i

- Premium Figure 1

LO en ~ ~ ~ try ~ ~ ~ lri Tim

Nepal Black Official and Premium Exch

i ~I--middot--middotmiddot--middot--middot~-middot--middot--middot- t~I~ Premiu

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0

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1450 P 400 remlu 7 J~~~j 350~ 600

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200 __ Premium Figure 1 pound 300 150 L _~________----l

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Tim

Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

- - - Premium Figur

Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

2000 t __-- +2000 o FiFI_FITtrTl=nn--rrrr--IIIllllimiddot1111 11 0 ~ ~ ~ ~ ~ N ~ re ~ ~ ~ ~ ~ ~

Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

25 III

Jl 20cu n amp 15 c ~ 10 ~ w 5

Phillipines Black Official and Premium Exch

I I I

II t

III I I I - I - 1

t1--shy

~ on en CI CI

Tim

4 Premlu

3

2 ~= Black Market Exchange --Official Exchange Rate - - - Premium Figure 1

0

-1

Somalia Black Official and Premium Exch

1450 P 400 remlu 7 J~~~j 350~ 600

CI) 500 1 300 ~~Black Market Exchange Cl 250 bull --Official Exchange Rate ~ 400t

200 __ Premium Figure 1 pound 300 150 L _~________----l

~ 200~ 100r middotmiddotmiddot 50100+

O~ImiddotIIIIIIII H-j-+++++I 111111111111111+--1 deg ~ on en ~ ~ N ~ ~ ~ ~ ~ ~ ~ ~

Tim

South Africa Black Official and Premium Exc

~---~ ---~~--- ------ 0 Premiu

-05

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-15 1 - - - Premium Figure 1

-2

+++H+t+H+H++++t+H--+jbull ++++t+H+H++++++++++ff- -25 ~ ~ on en M ~ ~ on en M ~ CI CI CI M M V V V on

Tim

Figure 05 5

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

- - - Premium Figur

Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

2000 t __-- +2000 o FiFI_FITtrTl=nn--rrrr--IIIllllimiddot1111 11 0 ~ ~ ~ ~ ~ N ~ re ~ ~ ~ ~ ~ ~

Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Uganda Black Official and Premium Exchange Rates

Premium

r--~Black Market Exchange Ra~l I---Qfficial Exchange Rate

- - - Premium Figur

Yugoslavia Black Official and Premium Exchange Rates

18000 ~------------ --------- ------ 18000 Premium II) 16000 16000 ~ 14000 14000 a 12000 12000 =---=--=Black Market Exchange Rate ~ 10000 10000 I Qffjci~1 Exchange Rate IRi 8000 8000 Figur- - - Premium ~ 6000 - +6000 w 4000 -T- - _C 4000

2000 t __-- +2000 o FiFI_FITtrTl=nn--rrrr--IIIllllimiddot1111 11 0 ~ ~ ~ ~ ~ N ~ re ~ ~ ~ ~ ~ ~

Time

Figure 06

6

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

This is a list of recent CARESS Working Papers A complete list (dating from inception of the series) can be obtained by writing to

Ms Diana Smith CARESS 3718 Locust Walk McNeil Building Philadelphia PA 19104-6297

94-01 Expected Utility and Case-Based Reasoning by Akihiko Matsui 94-02 Sequential Stratified Sampling by Edward J Green and Ruilin Zhou 94-03 Bargaining Boldness and Nash Outcomes by Simon Grant and Atsushi Kajii 94-04 Learning and Strategic Pricing by Dirk Bergemann and Juuso Valimaki 94-05 Evolution in Mechanisms for Public Projects by Roger D Lagunoff and Akihiko Matsui (previous version 93-14) 94-06 Constrained Suboptimality in Incomplete Markets A General Approach and Two Applications by Alessandro Citanna Atsushi Kajii and Antonio Vilshylanacci 94-07 Pareto Improving Financial Innovation in Incomplete Markets by David Cass and Alt[x Citanna (previous version 93-27) 94-08 Commodity Money Under Private Information by Yiting Li 94-09 Generic Local Uniqueness in the Walrasian Model A Pedagogical Note by Marcos de Barros Lisboa 94-10 Bargaining-Induced Transaction Demand for Fiat Money by Merwan Engineer and Shouyong Shi 94-11 Politico-Economic Equilibrium and Economic Growth by Per Krusell Vincenzo Quadrini and Jose- Victor Rios-Rull 94-12R On the Evolution of Pareto Optimal Behavior in Repeated Coordination Problems by Roger D Lagunoff 94-13 Evolution and Endogenous Interactions by George J Mailath Larry Samuelson and A vner Shaked 94-14R How Proper is Sequential Equilibrium by George J Mailath Larry Samuelson and Jeroen M Swinkels 94-15 Common p-Belief The General Case by Atsushi Kajii and Stephen Morshyris Revised and~final version forthcoming in Games and Economic Behavior 94-16 Impact of Public Announcements on Trade in Financial Markets by Stephen Morris and Hyun Song Shin

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

94-17 Payoff Continuity in Incomplete Information Games and Almost Uniform Convergence of Beliefs by Atsushi Kajii and Stephen Morris 94-18 Public Goods and the Oates Decentralisation Theorem by Julian Manshyning 94-19 The Rationality and Efficacy of Decisions under Uncertainty and the Value of an Experiment by Stephen Morris and Hyun Song Shin Revised and final version forthcoming in Economic Theory 94-20 Does Rational Learning Lead to Nash Equilibrium in Finitely Repeated Games by Alvaro Sandroni 94-21 On the Form of Transfers to Special Interests by Stephen Coate and Stephen Morris Revised andJinal version appears in the Journal of Political Economy 103 1210shy1235 94-22 Specialization of Labor and the Distribution of Income by Akihiko Matsui and Andrew Postlewaite 95-01 Financial Innovation and Expectations by Alessandro Citanna and Anshytonio Villanacci 95-02 An Economic Model of Representative Democracy by Tim Besley and Stephen Coate 95-03 The Revelation of Information and Self-Fulfilling Beliefs by Jayasri Dutta and Stephen Morris Revised version forthcoming in Journal of Economic Theory 95-04 Justifying Rational Expectations by Stephen Morris 95-05 Co-operation and Timing by Stephen Morris 95-06 Statistical Discrimination Affirmative Action and Mismatch by Jaewoo Ryoo 95-07 Sufficiently Specialized Economies have Nonempty Cores by Roger D Lagunoff 95-08 Ne~sary and Sufficient Conditions for Convergence to Nash Equilibrium The Almost Absolute Continuity Hypothesis by Alvaro Sandroni 95-09 Budget-constrained Search by Richard Manning and Julian Manning 95-10 Efficient Policy Choice in a Representative Democracy A Dynamic Analyshysis by Timothy Besley and Stephen Coate 95-11 The Sequential Regularity of Competitive Equilibria and Sunspots by Atsushi Kajii 95-12 Generic Existence of Sunspot Equilibria The Case of real Assets by Piero Gottardi and Atsushi Kajii 95-13 Speculative Investor Behavior and Learning by Stephen Morris

2

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

Revised and final version appears in Quarterly Journal of Economics 111 1111shy1133 95-14 Incorporating Concern for Relative Wealth into Economic Models by Harold L Cole George J Mailath and Andrew Postlewaite 95-15 An Anti-Folk Theorem for a Class of Asynchronously Repeated Games by Roger Lagunoff and Akihiko Matsui 95-16 Correlated Equilibria and Local Interactions by George J Mailath Larry Samuelson and A vner Shaked 95-17 A Rudimentary Model of Search with Divisible Money and Prices by Edward J Green and RuBin Zhou 95-18 The Robustness of Equilibria to Incomplete Informationby Atsushi Kajii and Stephen Morris Revised and final version forthcoming in Econometrica 95-19 Policy Persistence by Stephen Coate and Stephen Morris 95-20 Underemployment of resources and self-confirming beliefsby Alessandro Citanna Herve Cres + and Antonio Villancci 96-01 Multiplicity of Equilibria by Christian Ghiglino and Mich Tvede 96-02 Word-of-Mouth Communication and Community Enforcement by Illtae Ahn and Matti Suominen 96-03 Dynamic Daily Returns Among Latin Americans and Other Major World Stock Mark~~s by Yochanan Shachmurove 96-04 ClasslSystems and the Enforcement of Social Norms by Harold L Cole George J Mailath and Andrew Postlewaite 96-05 Dynamic Liquidation Adjustment of Capital Structure and the Costs of Financial Distress by Matthias Kahl 96-06 Approximate Common Knowledge Revisited by Stephen Morris 96-07 Approximate Common Knowledge and Co-ordination Recent Lessons from Game Theory by Stephen Morris and Hyun Song Shin Forthcoming in Journalof Logic Language and Information 96-08 Affirmative Action in a Competitive Economy by Andrea Moro and Peter Norman 96-09 An Alternative Approach to Market Frictions An Application to the Market for Taxicab Rides by Ricardo A Lagos 96-10 Asynchronous Choice in Repeated Coordination Games by Roger Lashygunoff and Akihiko Matsui 97-01 Contagion by Stephen Morris 97-02 Interaction Games A Unified Analysis of Incomplete Information Local Interaction and Random Matching by Stephen Morris

3

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4

97-03 The Premium in Black Dollar Markets by Yochanan Shachmurove

4