پویایی قیمت در بازار سیاه بلاروس برای ارز خارجی  Price dynamics in the Belarusian black market for foreign exchange

1. Introduction We empirically investigate the interplay between black market and official exchange rates in Belarus. We use information from Prokopovi. ch, an internet platform that was launched in April 2011. Prokopovi.ch allows Belarusian citizens to trade in a functioning two-way market which, as we show, incorporated publicly available information in an ef- ficient manner. We were able to create a daily-level data set spanning a period of time which coincided with a currency crisis. An ongoing deterioration of the current account and diminishing official reserve assets in early 2011 led to increased dysfunction in the official foreign exchange market within Belarus, as banks increasingly refused to sell foreign currency at the official rates. Starting in May 2011, the Lukashenko regime repeatedly devalued the Belarusian ruble, and, in October 2011 finally abandoned fixed exchange rates that had significantly overvalued it. We use several statistical techniques to investigate how the official and black market exchange rates interacted during this period. Our data suggest that the devaluations and the transition towards a free floating regime were anticipated by the black market. Since buying or selling currency in a black market is, by definition, illegal, the participants in the web site could have been subject to prosecution by the police and the secret service. It would also have been possible for the government to manipulate postings, for instance through artificial orders at too high a rate. However, the web site’s administrators are not aware of any, even anecdotal evidence of interference by the government. This is a common feature of black markets for foreign exchange: usually, they are tolerated by governments, which is why they are often referred to as parallel markets. The course of events we describe over half a year mirrors what Reinhart and Rogoff (2004) observe for 153 countries over the half century that followed World War II. Fixed exchange rate regimes were an integral part of the Bretton Woods system, which had been agreed upon in 1944. However, the rigidities due to the Bretton Woods system led to the emergence of black markets. Reinhart and Rogoff (2004) showed that the rates in the black markets were predictors of devaluations. Free-floating exchange rate regimes have been in place since the collapse of Bretton Woods in 1971. But through interventions in foreign exchange markets, central banks still exert great influence on foreign exchange rates. Consequently, Reinhart and Rogoff (2004) argue that the labeling of the Bretton Woods period as one with fixed exchange rate regimes and of the current period as one with free-floating foreign exchange rates is misleading. The official decisions to devalue and to abandon the fixed exchange rate regime may have been affected by the source of our data. Contrary to Reinhart and Rogoff (2004), some of the existing literature on black markets for foreign exchange (e.g. Dornbusch et al., 1983) treats official exchange rates and interest rates as exogenous to black market activity. In the past, in certain settings, black markets may have been small enough to assume that their economic impact was negligible. But their role may have changed. There are two reasons why the decisions of policy makers in repressive economies have become more likely to be affected by activity in black markets. First, the internet has reduced the costs of transactions in black markets, leading to an increase in activity when the official rate is pegged. Second, the internet has made black market exchange rates observable to a broader public. Shortages of foreign currency indicated that the Belarusian ruble was overvalued, but the website made market-clearing values publicly available. This increased transparency seems to have reinforced people’s doubts about the sustainability of the fixed exchange rate regime.