Do reductions in black market exchange rate premia cause inflation?

Unification of the black and official exchange rates and increasing the rate of crawl of the official rate are the competing prescriptions to reduce inefficiencies caused by the black market premia. Pinto (1991) showed that the removal of implicit export taxes could force governments to raise inflation to finance their budget deficit. Park (1995) and Morris (1995) demonstrated that unification need not raise the steady-state level of inflation. In this paper, we investigate the inflation-black market exchange rate premium relationship using time series techniques for Argentina, Peru and Zambia. The empirical evidence from Argentina and Peru tends to support Park and Morris' post-unification low inflation scenario. In contrast, the generalized impulse response functions derived from Zambia's cointegrating VAR support Pinto's result since a temporary positive shock to the black market premium cause a permanent reduction in inflation. However, stability tests suggest that the relationships embodied in the cointegrated system of Zambia are unstable.