Indirect Speculative Attacks and the Black Market for Foreign Exchange: The Example of Sudan

Abstract

The paper extends the recent literature on collapsing exchange rates and balance of payment crises to the case when currency inconvertibility gives rise to the emergence of an "illegal" black market. The presence of the black market generates indirect speculative attacks on the official reserves because, due to inconvertibility, agents cannot directly buy official reserves. The paper derives several conditional probability statements regarding the likelihood of successful devaluation as a way to unify the official and black market exchange rates and achieve economic stabilization.