WORK IN PROGRESS
- "The Black Market for Currencies: Theory and Evidence"
This paper proposes a tractable model of the black market for currencies where the black market premium on foreign currency arises endogenously and depends on the relative inflation rates of domestic and foreign currencies. Experience from countries like Argentina, Zimbabwe etc. suggests that higher domestic inflation is associated with higher rates of black market premium on foreign currency. I analyze data from Iran, Venezuela and four South Asian economies between 1981-1997 using a panel VAR and fixed effect panel regression and find a negative association between the two variables. The pattern is also noticed in case of India when studied separately. Using a New Monetarist framework, I offer a plausible explanation as to why this association could be negative. The black market is modeled as a market of currency exchange that can be used by buyers of one country to readjust their portfolio when access to the official market is infrequent and after the realization of a shock that forces them to either consume local or foreign goods. I show that after allowing for currency substitution in the portfolio choice problem of the agents, in the stationary monetary equilibrium the rate of black market premium could be decreasing in the domestic inflation rate if agents are not very risk averse. Else, if agents are sufficiently risk averse, then the black market premium is increasing in domestic inflation.
- “Currency Competition under Restrictions on Foreign Currency Use”
When faced with currency competition, a country’s government has two tools at its disposal: reduce the level of inflation or place institutional barriers to the use of foreign currency. This paper proposes a two-country, two-currency version of Lagos and Wright (2005) model to study currency competition. We model institutional barriers as a ‘tax’ on the real value of foreign currency holdings which tends to lower a currency’s value abroad than at home. This tax-induced asymmetric valuation of currencies by economic agents from different countries leads to a set of rich and unique equilibrium currency regimes thus overcoming the multiplicity of equilibrium often noticed in models of currency competition.
- "Capital Account Openness and Exchange Rate Manipulation in the post-Bretton Woods Era”
Institutional barriers to the choice of currency in which agents carry out trades or denominate the value of goods, services and assets are manifestations of the restrictions that exist on the financial openness of a country. This paper tries to examine whether capital controls in certain countries had any effect in providing buoyancy to its domestic currency vis-a-vis the US dollar, an international currency. We use a country-by- country structural vector autoregression (SVAR) approach to answer this question using data from three emerging market economies – Chile, India and Malaysia for the time period of 1970-2013. Overall, our analysis suggests a role for such restrictions in affecting the nominal exchange rate. However, such effects are limited to the short-run and their effectiveness vary by country.
WORK IN PROGRESS
- "'Raiders' and Cultural Subsumption"
One might expect that a relatively small and economically less productive group be gradually influenced by a bigger, relatively affluent group. The former will be drawn to the latter's affluence and slowly try to imbibe the latter's ways and become one of them. In this paper, I show that this is not always the case. The cultural transition described earlier might work only in the absence of conflict. In the presence of conflict, the smaller and less productive group could culturally influence the bigger, more productive group. A small, less productive group is likely to engage in a higher degree of appropriatory activities since the opportunity cost for such activities is smaller for them. The higher degree of appropriation raises per-capita income for the smaller, less productive group thus providing an incentive to members of the more productive group to change their affiliation. Two historical examples may be made in favor of this argument: (a) Turkification of Anatolia (b) spread of Indo-European languages in the Indian subcontinent.