LAW-ENFORCEMENT AND THE BLACK-MARKET EXCHANGE-RATE

This paper examines how a system of multiple exchange rates can give rise to unreported exports and imports and a black market for foreign exchange. Risk aversion rather than an assumed smuggling or detection technology generally guarantees the coexistence of legal and illegal trading. Evidence for Brazil suggests that enforcement of the exchange rate and trade regime is an important fundamental of the black market exchange rate that has so far invariably been left out of empirical work. © 1991.