Inflation and the Black Market Exchange Rate in a Repressed Market: A Model of Venezuela
53 Pages Posted: 9 Dec 2016
Date Written: August 2016
This paper presents a stylized general equilibrium model of the Venezuelan economy. The model explains how the recent sharp fall in oil revenue combines with foreign exchange rationing to produce a steep rise in inflation. Counter intuitively, a devaluation of the official exchange rate could temporarily reduce inflation. The model also explains how the hyper-depreciation of the black market exchange rate reflects prices in the most distorted goods markets.
Keywords: Inflation, Venezuela, Fiscal policy, Monetary policy, Devaluation, Official exchange market rates, Shadow economy, Consumer goods, General equilibrium models, inflation; black market; exchange rate; Venezuela; foreign exchange rationing;scarcity; cash in advance constraint; oil revenue; fiscal dominance
JEL Classification: F40, E10, P40
Suggested Citation: Suggested Citation