IDEAS home Printed from https://ideas.repec.org/a/arp/ijefrr/2017p76-90.html
   My bibliography  Save this article

Transmission Effect of the Interaction between Parallel and Official Foreign Exchange Markets in Nigeria

Author

Listed:
  • Ogbulu, Onyemachi Maxwell

    (Department of Banking and Finance, Abia State University, Uturu, Abia State, Nigeria)

  • Torbira, Lezaasi Lenee

    (Finance and Banking Department, Faculty of Management Sciences, University of Port Harcourt, Port Harcourt, Nigeria)

Abstract

This study investigates whether there is any interaction existent between the exchange rate movements in the official and parallel foreign exchange markets and whether or not the official exchange rate manipulation can serve as an instrument for controlling the parallel market rate. The study utilizes annual data series for official foreign exchange rate and parallel foreign exchange rate in Nigeria for the periods 1980-2012. We employed the unit root test, Q-test, BDS and ARCH test to evaluate the linear dependence and volatility in the series while the Bivariate GARCH was used to test for transmission existent between the official and the parallel foreign exchange markets. The unit root test results report that all the variables prove to be stationary at first difference, the Q-test shows evidence of no linear dependence in the series thereby suggesting that the series are not linearly correlated and that both the official and parallel exchange rates are random in nature. The BDS test revealed the existence of linear dependence meaning that there is serial correlation existent between the items in the series and also suggesting that both the official exchange rate and the parallel exchange rate can be predicted. The ARCH test results indicate that there is the influx of volatility in the two markets and that the series are volatile in nature. The Bivariate GARCH test for transmission existent between the two markets reveals that volatility does not transmit from the official foreign exchange market to the parallel foreign exchange market. This negates the exchange rate pass-through theory but supports the theory of exchange rate disconnect. The study therefore posits that changes in the official exchange rates are not important in explaining or influencing changes in the parallel exchange market in Nigeria. Thus, policy makers may not be able to use the manipulations of the official foreign exchange rate as a tool for controlling the activities of the parallel foreign exchange market in Nigeria. The study recommends that the managers of the Nigeria economy should ensure influxive design and implementation of policies and strategies that will ensure a more favourable official exchange rate regime in Nigeria so as to eliminate the wide premium existent between the two markets.

Suggested Citation

  • Ogbulu, Onyemachi Maxwell & Torbira, Lezaasi Lenee, 2017. "Transmission Effect of the Interaction between Parallel and Official Foreign Exchange Markets in Nigeria," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(6), pages 76-90, 06-2017.
    • Handle: RePEc:arp:ijefrr:2017:p:76-90
    as

    Download full text from publisher

    File URL: http://www.arpgweb.com/pdf-files/ijefr3(6)76-90.pdf
    Download Restriction: no
    File URL: http://www.arpgweb.com/?ic=journal&journal=5&month=06-2017&issue=6&volume=3
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sebastian Edwards & Peter J. Montiel, 1989. "Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 875-903, December.
    2. Kiguel, Miguel & O'Connell, Stephen A, 1995. "Parallel Exchange Rates in Developing Countries," The World Bank Research Observer, World Bank, vol. 10(1), pages 21-52, February.
    3. Sebastian Edwards, 1989. "Real Exchange Rates in the Developing Countries: Concepts and Measure- ment," NBER Working Papers 2950, National Bureau of Economic Research, Inc.
    4. Gupta, Kanhaya L, 1987. "Aggregate Savings, Financial Intermediation, and Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 303-311, May.
    5. Derrese Degefa, 2001. "The parallel foreign exchange market and macroeconomic performance in Ethiopia," Working Papers 107, African Economic Research Consortium, Research Department.
    6. Pinto, Brian, 1989. "Black Market Premia, Exchange Rate Unification, and Inflation in Sub-Saharan Africa," The World Bank Economic Review, World Bank, vol. 3(3), pages 321-338, September.
    7. Bahram Adrangi & Mary Allender & Kambiz Raffiee, 2011. "An Ex-Post Empirical Investigation of the Efficacy of Central Bank Interventions in Currency Markets: Bilateral Exchange Rate of the Dollar," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 19-34, August.
    8. Jorge Braga de Macedo, 1985. "Macroeconomic Policy Under Currency Inconvertibility," NBER Working Papers 1571, National Bureau of Economic Research, Inc.
    9. Culbertson, William Patton, Jr, 1975. "Purchasing Power Parity and Black-Market Exchange Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 287-296, June.
    10. de Macedo, Jorge Braga, 1987. "Currency inconvertibility, trade taxes and smuggling," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 109-125, October.
    11. Dornbusch, Rudiger, 1986. "Special Exchange Rates for Capital Account Transactions," The World Bank Economic Review, World Bank, vol. 1(1), pages 3-33, September.
    12. Jagdish Bhagwati & Bent Hansen, 1973. "A Theoretical Analysis of Smuggling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(2), pages 172-187.
    13. Sheikh, Munir A., 1974. "Smuggling, production and welfare," Journal of International Economics, Elsevier, vol. 4(4), pages 355-364, November.
    14. Braga de Macedo, Jorge, 1987. "Currency Inconvertibility, Trade Taxes and Smuggling," CEPR Discussion Papers 162, C.E.P.R. Discussion Papers.
    15. Rudiger Dornbusch & Daniel Valente Dantas & Clarice Pechman & Roberto de Rezende Rocha & Demetrio SimÅes, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 25-40.
    16. Jeremy Greenwood & Kent P. Kimbrough, 1987. "An Investigation in the Theory of Foreign Exchange Controls," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 271-288, May.
    17. Pitt, Mark M., 1981. "Smuggling and price disparity," Journal of International Economics, Elsevier, vol. 11(4), pages 447-458, November.
    18. Saul Lizondo, Jose, 1987. "Unification of dual exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 57-77, February.
    19. Robert J. Barro & Jong-Wha Lee, 1993. "Losers and Winners in Economic Growth," NBER Working Papers 4341, National Bureau of Economic Research, Inc.
    20. Pinto, Brian, 1991. "Black markets for foreign exchange, real exchange rates and inflation," Journal of International Economics, Elsevier, vol. 30(1-2), pages 121-135, February.
    21. John Roberts, 1989. "Liberalizing Foreign‐Exchange Rates in Sub‐Saharan Africa," Development Policy Review, Overseas Development Institute, vol. 7(2), pages 115-142, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Penu, Samuel Lucky & Nkanbia-Davies, Lilian Okorite, 2017. "Implications of Exchange Rate Fluctuation and Economic Performance: The Nigerian Experience," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(10), pages 206-217, 10-2017.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, vol. 21(2), pages 238-259, June.
    2. Onour, Ibrahim A, 2000. "Unification of Dual Foreign Exchange Markets," Economic Change and Restructuring, Springer, vol. 33(3), pages 171-184.
    3. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Other publications TiSEM e01fa769-96e8-4c5e-b9b5-a, Tilburg University, School of Economics and Management.
    4. Farzanegan, Mohammad Reza, 2009. "Illegal trade in the Iranian economy: Evidence from a structural model," European Journal of Political Economy, Elsevier, vol. 25(4), pages 489-507, December.
    5. Onour, Ibrahim, 2010. "South Sudan Referundum: A Macroeconomic Analysis of Post-Secession Scenario," MPRA Paper 29897, University Library of Munich, Germany.
    6. Onour, Ibrahim, 2011. "Financial stability in small open economy under political uncertainty," MPRA Paper 29883, University Library of Munich, Germany.
    7. Goldberg, Linda S. & Karimov, Il'dar, 1997. "Black markets for currency, hoarding activity and policy reforms," Journal of International Economics, Elsevier, vol. 42(3-4), pages 349-369, May.
    8. Jorge Braga de Macedo, 1985. "Macroeconomic Policy Under Currency Inconvertibility," NBER Working Papers 1571, National Bureau of Economic Research, Inc.
    9. Mina Baliamoune-Lutz, 2010. "Black and official exchange rates in Morocco: an analysis of their long-run behaviour and short-run dynamics (1974-1992)," Applied Economics, Taylor & Francis Journals, vol. 42(27), pages 3481-3490.
    10. Ndlela, Thandinkosi, 2010. "Implications of real exchange rate misalignment in developing countries: theory, empirical evidence and application to growth performance in Zimbabwe," MPRA Paper 32710, University Library of Munich, Germany.
    11. Onour, Ibrahim & Cameron, Norman, 1997. "Parallel Market Premia and Misalignment of Official Exchange Rates," MPRA Paper 15537, University Library of Munich, Germany.
    12. Linda S. Goldberg & Ildar Karimov, 1992. "Black-Markets for Currency, Hoarding Activity and Currency Reform," NBER Working Papers 4153, National Bureau of Economic Research, Inc.
    13. Connely, Michael & Devereux, John & Cortes, Mariluz, 1995. "The transhipment problem: Smuggling and welfare in Paraguay," World Development, Elsevier, vol. 23(6), pages 975-985, June.
    14. Ibrahim ONOUR, 2018. "Technical Trading Rules And Trading Signals In The Black Market For Foreign Exchange In Sudan," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 9(1), pages 25-31.
    15. Lahiri, Sajal & Nasim, Anjum & Ghani, Jawaid, 2000. "Optimal second-best tariffs on an intermediate input with particular reference to Pakistan," Journal of Development Economics, Elsevier, vol. 61(2), pages 393-416, April.
    16. Tariq Banuri, 1989. "Black Markets, Openness, and Central Bank Autonomy," WIDER Working Paper Series wp-1989-062, World Institute for Development Economic Research (UNU-WIDER).
    17. Rafat MAHMOOD & Eatzaz AHMAD, 2015. "Measurement Of Import Smuggling In Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 25(2), pages 135-159.
    18. Aron, Janine & Elbadawi, Ibrahim A., 1992. "Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia," Policy Research Working Paper Series 909, The World Bank.
    19. Kiguel, Miguel A. & O'Connell, Stephen A., 1994. "Parallel exchange rates in developing countries : lessons from eight case studies," Policy Research Working Paper Series 1265, The World Bank.
    20. Panayiotis Diamantis & Dimitris Georgoutsos & George Kouretas, 2001. "The Monetary Approach in the Presence of I(2) Components: A Cointegration Analysis of the Official and Black Market for Foreign Currency in Latin America," Working Papers 0108, University of Crete, Department of Economics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arp:ijefrr:2017:p:76-90. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Managing Editor (email available below). General contact details of provider: http://www.arpgweb.com/?ic=journal&journal=5&info=aims .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.