The Impact of Corruption on the Black Market Premium

Recently the impact of institutional factors on macro variables has been gaining momentum. Researchers have investigated the impact of corruption, law and order, and bureaucracy on economic growth, inflation, investment, productivity, and the real exchange rate. In this article, we investigate empirically the impact of institutional factors on the black market premium. In many developing nations, because of government restrictions on capital and trade flows, there exists a black market for foreign exchange. By using data from 60 developing countries over the 1982-1995 period, we show that the black market premium is higher in countries that are plagued by more corruption. This finding seems to be insensitive to five different measures of corruption as well as whether cross-section or panel data are used.