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THE BLACK MARKET FOR DOLLARS IN VENEZUELA
SAMUEL MALONE AND ENRIQUE TER HORST
Abstract. In February 2003, the Venezuelan government imposed a strict capital control
policy to stem the outðow of dollars. We describe the mechanics and structure of the result-
ing black market for foreign exchange, present a theoretical model in the stock-ðow tradition
of Dornbusch et al. (1983), and evaluate the performance of our model against past models
from the literature. Our model of the Venezuelan black market premium is parsimonious
but achieves the lowest RMSE. We ïnd a signiïcant role for the lagged premium, the rate
of depreciation of the black market rate, and changes in foreign reserves.
1. Introduction
In February of 2003, following the paro petrolero, or \oil strike", that temporarily paralyzed
economic activity in the country, the Venezuelan government decided to impose a strict
capital control policy to stem the outðow of US dollars.
This policy led naturally to the
creation of a black market for dollars. From that point onward, consumers and importers
of foreign goods have had to apply to the state bureaucracy, known as CADIVI for its
acronym in Spanish, for the dollars that are rationed at the oñcial exchange rate from the
government's supply of foreign reserves. The surplus demand for dollars is met by the black
market, and the black market premium on dollars has been positive, sometimes well above
100%, since the beginning of the capital control policy.
The recent experience with a black market for foreign currency in Venezuela is not the
ïrst for the country. Capital controls have been particularly tempting for policymakers
during past periods of falling international reserves, such as 1960-1964, and later during
the period 1983-1988, following the collapse of the international price of oil in the early
1980s. In earlier...