Abstract:
This paper looks into the changes of the black market premium for foreign exchange in
Zimbabwe. Generally, the black market for foreign exchange arises as a direct
consequence of the adoption of exchange rate controls in many developing economies
facing substantial macroeconomic imbalances. Despite its negative impact on
Zimbabwe’s economy, this market has not, so far, attracted the attention of researchers.
The research attempts to describe the functioning of the black market and find out the
determinants of the parallel premium based on a stock-flow model as well as to
investigate whether inflation Granger causes the parallel exchange rate. Estimated results
reveal that the determinants of the black market premium are international foreign
reserves, real exchange rate, lagged values of the black market premium, expected rate of
devaluation, money supply and inflation. On the other hand, inflation and black market
are found to Granger-cause each other during the period under consideration.
