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Purchasing power parity in the presence of foreign exchange black markets: the case of India

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  • Hamid Baghestani
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    Abstract

    The empirical validity of $b;PPP$eb; as a long-run constraint between India and the US is examined in the preesence of foreign exchange black markets. In a triariate model, the official exchange rate is found to be coinergrated with both the price ratio and the black market exchange rate. Both the official exchange rate and price ratio respond to correct short-run departures from $b;PPP$eb;. Also, both the official and the black market exchange rates respond to correct departures from their own equilibrium relation. The two sources of endogeneity in the official rate follow rate follow as Indian authorities aimed to stabilize domestic prices and reduce uncertainty about the dollar price of rupees.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 29 (1997)
    Issue (Month): 9 ()
    Pages: 1147-1154

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    Handle: RePEc:taf:applec:v:29:y:1997:i:9:p:1147-1154

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    1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    2. Lawrence H. Officer, 1982. "The Purchasing-Power-Parity Theory of Gerrard de Malynes," History of Political Economy, Duke University Press, vol. 14(2), pages 256-259, Summer.
    3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
    4. Enders, Walter, 1989. "Unit roots and the real exchange rate before World War I: the case of Britain and the USA," Journal of International Money and Finance, Elsevier, vol. 8(1), pages 59-73, March.
    5. Enders, Walter, 1988. "ARIMA and Cointegration Tests of PPP under Fixed and Flexible Exchange Rate Regimes," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 504-08, August.
    6. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    7. Hali J. Edison & Jan Tore Klovland, 1983. "A quantitative reassessment of the purchasing power parity hypothesis : evidence from Norway and the United Kingdom," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 231, Board of Governors of the Federal Reserve System (U.S.).
    8. Mark P. Taylor, 2003. "Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 11(3), pages 436-452, 08.
    9. Jeffrey A. Frankel, 1985. "International capital mobility and crowding-out in the U.S. economy: imperfect integration of financial markets or of goods markets?," Proceedings, Federal Reserve Bank of St. Louis, pages 33-74.
    10. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
    11. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    12. David A. Dickey & Dennis W. Jansen & Daniel L. Thornton, 1991. "A primer on cointegration with an application to money and income," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 58-78.
    13. Corbae, Dean & Ouliaris, Sam, 1988. "Cointegration and Tests of Purchasing Power Parity," The Review of Economics and Statistics, MIT Press, vol. 70(3), pages 508-11, August.
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    Cited by:
    1. Alper ASLAN, 2010. "The validity of PPP: evidence from Lagrange multiplier unit root tests for ASEAN countries," Economics Bulletin, AccessEcon, vol. 30(2), pages 1433-1443.
    2. Georgios Kouretas & Leonidas Zarangas, 2001. "Long-Run Purchasing Power Parity and Structural Change: The Official and Parallel Foreign Exchange Markets For Dollars In Greece," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 15(3), pages 109-128.
    3. Mahbub Morshed, A. K. M., 2003. "What can we learn from a large border effect in developing countries?," Journal of Development Economics, Elsevier, vol. 72(1), pages 353-369, October.
    4. Diamandis, Panayiotis F., 2003. "Market efficiency, purchasing power parity, and the official and parallel markets for foreign currency in Latin America," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 89-110.
    5. Mario Cerrato & Nicholas Sarantis, 2007. "Does purchasing power parity hold in emerging markets? Evidence from a panel of black market exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(4), pages 427-444.
    6. Renu Kohli, 2004. "Real Exhange Rate Stationarity in Managed Floats: Evidence From India," International Finance, EconWPA 0405014, EconWPA.
    7. Bahmani-Oskooee, Mohsen & Tankui, Altin, 2008. "The black market exchange rate vs. the official rate in testing PPP: Which rate fosters the adjustment process?," Economics Letters, Elsevier, vol. 99(1), pages 40-43, April.
    8. Kohli, Renu, 2003. "Real exchange rate stabilisation and managed floating: exchange rate policy in India, 1993-2001," Journal of Asian Economics, Elsevier, vol. 14(3), pages 369-387, June.

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