publication . Article . 2003

Smuggling, non-fundamental uncertainty, and parallel market exchange rate volatility

Richard Clay Barnett;
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  • Published: 01 Jan 2003 Journal: Canadian Journal of Economics/Revue Canadienne d`Economique, volume 36, pages 701-727 (issn: 0008-4085, eissn: 1540-5982, Copyright policy)
  • Publisher: Wiley
Abstract
We explore a model where smuggling and a parallel currency market arise, owing to government restrictions that prevent agents from legally holding foreign exchange. Despite such restrictions, agents are able to diversify their savings, holding both domestic and parallel foreign cash, basing their portfolio allocation on current and prospective parallel exchange rates. We attribute movements in parallel rates to non-fundamental uncertainty. The model generates equilibria with both positive and negative parallel premia and correlations between illegal trade and the premium. The model has the novel implication that currency speculation drives smuggling, affecting r...
Subjects
free text keywords: Foreign exchange, Cash, media_common.quotation_subject, media_common, Microeconomics, Exchange rate volatility, Financial economics, Foreign exchange market, Economics, Speculation, Grey market, Economic sector, Government, jel:F31
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publication . Article . 2003

Smuggling, non-fundamental uncertainty, and parallel market exchange rate volatility

Richard Clay Barnett;