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Black market exchange rates in India: an empirical analysis

Author

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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.

Suggested Citation

  • Jalal U. Siddiki, 2000. "Black market exchange rates in India: an empirical analysis," Empirical Economics, Springer, vol. 25(2), pages 297-313.
    • 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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    Citations

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    Cited by:

    1. 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.
    2. Ebaidalla Mahjoub Ebaidalla, 2017. "Determinants and Macroeconomic Impact of Parallel Market For Foreign Exchange in Sudan," Working Papers 1155, Economic Research Forum, revised 11 2017.
    3. Siddiki, Jalal Uddin & Morrissey, Oliver, 2006. "Capital inflows and the demand for money in South Asian countries," Economics Discussion Papers 2006-4, School of Economics, Kingston University London.
    4. Abbas Valadkhani & Majid Nameni, 2011. "How can Iran's black market exchange rate be managed?," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 38(2), pages 186-202, May.
    5. 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.

    More about this item

    Keywords

    Black market exchange rate; cointegration and error correction; trade liberalisation; forex reserves; India;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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