The Black Market for Foreign Exchange in the Former Soviet Union

Abstract

This paper examines the black market for foreign exchange in the former Soviet Union, using this analysis as a window on household behavior in asset markets under central planning. I argue that government restrictions on household behavior in goods and asset markets, combined with an absence of government control over the monetary situation, induced households to demand foreign currency in the black market for its value as an asset. I develop a model of the foreign currency black market which explicitly takes into account the institutional peculiarities of central planning. This approach clarifies the impact of high levels of government intervention in capital and foreign exchange markets. It also brings to light important areas of continuity between the pre-reform and reform eras in eastern and central Europe.