Venezuela Bolivar

Essay by alpha_diani November 2014

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Abstract. In February 2003, the Venezuelan government imposed a strict capital control

policy to stem the out°ow of dollars. We describe the mechanics and structure of the result-

ing black market for foreign exchange, present a theoretical model in the stock-°ow 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 ¯nd a signi¯cant 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 out°ow 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 o±cial 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

¯rst 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...