The Black Market for Dollars in Venezuela

Abstract

In February 2003, the Venezuelan government imposed a strict capital controls policy to stem the outflow of dollars. We describe the mechanics and structure of the resulting black market and analyze the comparative performance of alternative models in explaining and forecasting the black market premium. Robustly significant determinants of the premium include the lagged premium, the official real exchange rate, the implied returns from arbitrage, and the oil price. Our preferred model exhibits outstanding out-of-sample forecasting performance, with an average prediction error of -0.9 percent, and an error standard deviation of 7.8 percent, during the ten-month period until July 2009. We provide evidence that the exogenous change of the black market swap vehicle to government bonds in 2007 induced a significant shift in the relative importance of the determinants of the premium, causing shocks to become significantly more persistent, the coefficient on the implied returns from arbitrage to double, and rendering the beneficial effect of oil price increases insignificant.

Keywords:

• black market
• capital controls
• exchange rates
• forecasting