This paper examines the effects of various economic factors on the black market exchange rate premium in developing countries using monthly data from 1985 to 1989. The model analyzes the interaction of stock and flow conditions in determining both the premium on the black dollar and the stock of black money. Some of the factors this paper hypothesizes to de­ termine the black market premium is the official real exchange rate, the official depreciation-adjusted interest rate differential, the level of exports, and a seasonal factor associated with tourism.
The empirical results tend to agree with the findings of Dornbusch et. a1. (QJE, February 1983). These results are important because they provide a starting point for governments to control the level of black market activity.