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Black market exchange rates in India: an empirical analysis

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  • Jalal U. Siddiki

    ()
    (School of Economics, Kingston University, Penrhyn Road, Kingston, Surrey KT1 2EE, UK)

Abstract

In this paper, we explore the determinants of black market (BM) exchange rates in India using annual data from 1955-1994 and integration and cointegration analysis. Two important factors, namely the import capacity of official foreign exchange reserves and restrictions on international trade, have largely been ignored as determinants of BM rates. We stress the importance of these two factors and incorporate them, with others more familiar in the literature, in our theoretical and empirical model for BM rates in India. Our empirical findings show that a low level of official foreign exchange reserves negatively and a high level of trade restrictions positively affect BM rates. We show that the flexible Bretton Woods exchange rate policies for India in 1973 have a negative impact on BM rates. The results also reveal that interest rate policies positively affect BM rates. Thus, our empirical model lends support to the trade and monetary approaches to BM rates and hence, trade restrictions with excess money supply should be removed to eliminate the BMs for forex in India.

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Bibliographic Info

Article provided by Springer in its journal Empirical Economics.

Volume (Year): 25 (2000)
Issue (Month): 2 ()
Pages: 297-313

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Handle: RePEc:spr:empeco:v:25:y:2000:i:2:p:297-313

Note: Received: September 98/Final Version Received: January 2000
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Related research

Keywords: Black market exchange rate; cointegration and error correction; trade liberalisation; forex reserves; India;

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Cited by:
  1. Valadkhani, Abbas & Amin Reza Kamalian & Majid Nameni, 2009. "How can Iran’s black market exchange rate be managed?," Economics Working Papers wp09-07, School of Economics, University of Wollongong, NSW, Australia.
  2. Subrata Ghatak & Jalal Siddiki, 2001. "The use of the ARDL approach in estimating virtual exchange rates in India," Journal of Applied Statistics, Taylor & Francis Journals, vol. 28(5), pages 573-583.
  3. Daly V. & Siddiki J., 2001. "An Empirical Growth Model for India: 1954-1994," European Research Studies Journal, European Research Studies Journal, vol. 0(3-4), pages 141-154, July - De.

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