Uniform Commercial Policy, Illegal Trade, And The Real Exchange Rate: A Theoretical Analysis
World Bank Economic Review
Countries on fixed exchange rates sometimes use uniform tariff cum subsidy (UTCS) schemes as a way of achieving a real depreciation without disturbing the nominal exchange rate. A potential drawback of this policy in relation to an across-the-board devaluation is that a UTCS scheme provides incentives for illegal trade. Using an optimizing model with currency convertibility and illegal trade, I find that welfare is lower under a UTCS scheme than under a corresponding across-the-board devaluation and that in some cases the real exchange rate actually appreciates in response to an increase in the UTCS rate.
Stephen A. O'Connell.
"Uniform Commercial Policy, Illegal Trade, And The Real Exchange Rate: A Theoretical Analysis".
World Bank Economic Review.