Examine the connection and the differences between the official exchange rate market controlled by the CADIVI and the permuta. Discuss the states of equilibrium in each of these markets. Central banks intervene in foreign exchange markets in order to achieve a variety of overall economic objectives, such as controlling inflation, maintaining competitiveness or maintaining financial stability. The precise objectives of policy and how they are reflected in foreign exchange market intervention depend on a number of factors, including the stage of a country‟s development, the degree of financial market development and integration, and a country‟s overall vulnerability to shocks. The precise definition of which operations in forex markets constitute “intervention” has also been a matter of controversy (Adams, Henderson 1983).

After the Chavez administration imposed tight foreign exchange measures, with the intention of curbing the outflow of US dollars from Venezuela, citizens had to apply to the Comision de Administratracion de Divisas or CADIVI to buy dollars at the official exchange rate. The Central Bank of Venezuela would fix a monthly allocation of foreign currency to be administered by CADIVI, purchase foreign currency from residents, and sell foreign currency to the public and private sectors subject to approval from CADIVI (BIS 2005). Dollars sold were rationed and the US dollars supplied were not enough to fill the needs of the citizenry. The surplus demand was satisfied by a parallel market, the permuta, which the government allowed to operate. The CADIVI used a fixed exchange rate that valued the Venezuelan Bolivar higher than a floating exchange rate would. The rate is fixed, at first, at 2.15B to US$1, and later devalued to 4.3B to US$1. From fig. 1 (below) the fixed rate will result in a surplus of supply over demand of the bolivar. This is shown by the