Front Matter Page
Western Hemisphere Department
Contents
Abstract
I. Introduction
II. Background
III. Stylized General Equilibrium Model for Venezuela—w/ One Good and Balanced Trade
A. Contrast with previous literature on dual exchange rates
B. Summary of the basic structure of the economy
C. External, fiscal, and monetary sectors
D. Firms
E. Households
F. Equilibrium exchange rate
IV. Calibrations and Dynamic Simulations of One Good Model
A. Calibration of black market exchange rate
B. Dynamic simulations of inflation
Impact of fiscal policy
Impact of one-off devaluation of official exchange rate
Impact of devaluation cycles
Impact of a real shock: oil revenue decline
V. Black Market with Multiple Consumption Goods
A. The consequence of multiple goods
B. Two goods model
C. Simulation of black market rate in two goods model
D. Simulation of a devaluation
VI. Capital Flight
A. Simulation of overinvoicing and dollar savings by importers
B. Simulation of black market dollar savings (capital flight) by arbitrageurs
VII. Extensions of Model
A. Price controls
B. Nontraded good
C. Imported intermediate input
D. Other macro policies
Government spending in dollars
Issuance of external debt
Issuance of domestic debt
Accumulation of foreign exchange reserves
VIII. Conclusions
References
Appendices
Appendix 1. The Cagan Model—Not the Best Explanation for Inflation Surge
Appendix 2. Numerical example of monetization of deficits, devaluation, and sales of reserves by the central bank
Appendix 3. Household optimization with one good and CIA constraint
Appendix 4. Summary of model equations for dynamic simulations
Appendix 5. Two imported goods and dollar portfolio holdings
Appendix 6. Planner’s problem with FX in advance constraint
Appendix 7. Household portfolio decision with money and black market dollars
Appendix 8. Traded and nontraded goods
Tables
Table 1. Baseline
Figures
Figure 1. Typical market for (imported) good
Figure 2. Money growth raises prices and rents
Figure 3. A devaluation of the official rate squeezes rent
Figure 4. Large devaluation to a level above LOOP
Figure 4 (continued). Large devaluation to a level above LOOP
Figure 5. Oil revenue decline
Figure 6. Two goods economy
Figure 7. Price controls and scarcity
Figure 8. Simulation of an increase in allocation to black market
Figure 9. Simulation of devaluation
Figure 10. Simulation of overinvoicing good 1 to supply good 2
Figure 11. Simulation of capital flight used to supply market in the future