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Black Market and Official Exchange Rates: Long-Run Equilibrium and Short-Run Dynamics

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  • Guglielmo Maria Caporale
  • Mario Cerrato

Abstract

This paper presents further empirical evidence on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relationship between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, it also analyses the short-run dynamic responses of both markets to shocks. Finally, it tries to shed some light on the determinants of the market premium. Evidence of slow reversion to the long-run equilibrium is found. Further, it appears that capital controls and expected currency devaluation are the two main factors affecting the size of the premium and determining the breakdown in the proportionality relationship.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-11/cesifo1_wp1851.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1851.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1851

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Keywords: black market and official exchange rates; panel cointegration; impulse response functions;

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References

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  1. Booth, G. Geoffrey & Mustafa, Chowdhury, 1991. "Long-run dynamics of black and official exchange rates," Journal of International Money and Finance, Elsevier, vol. 10(3), pages 392-405, September.
  2. Newey, W.K. & West, K.D., 1992. "Automatic Lag Selection in Covariance Matrix Estimation," Working papers 9220, Wisconsin Madison - Social Systems.
  3. Chihwa Kao & Suzanne McCoskey, 1997. "A Residual-Based Test Of The Null Of Cointegration In Panel Data," Econometrics 9711002, EconWPA.
  4. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July.
  5. Lence, Sergio & Falk, Barry, 2005. "Cointegration, market integration, and market efficiency," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 873-890, October.
  6. Dornbusch, Rudiger, et al, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 25-40, February.
  7. Kiguel, Miguel & O'Connell, Stephen A, 1995. "Parallel Exchange Rates in Developing Countries," World Bank Research Observer, World Bank Group, vol. 10(1), pages 21-52, February.
  8. Kilian, Lutz, 1999. "Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 491-510, Sept.-Oct.
  9. Bahmani-Oskooee, Mohsen & Miteza, Ilir & Nasir, A. B. M., 2002. "The long-run relation between black market and official exchange rates: evidence from panel cointegration," Economics Letters, Elsevier, vol. 76(3), pages 397-404, August.
  10. George Kouretas & Leonidas Zarangas, . "Black and Official Exchange Rates in Greece: An Analysis of their long-run dynamics," Working Papers 9902, University of Crete, Department of Economics.
  11. Mario Cerrato & Neil Kellard & Nicholas Sarantis, 2008. "The Purchasing Power Parity Persistence Puzzle: Evidence From Black Market Real Exchange Rates," Manchester School, University of Manchester, vol. 76(4), pages 405-423, 07.
  12. Li, Hongyi & Maddala, G. S., 1997. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 80(2), pages 297-318, October.
  13. 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.
  14. Nita Ghei & Steven B. Kamin, 1996. "The use of the parallel market rate as a guide to setting the official exchange rate," International Finance Discussion Papers 564, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Ricky Chee Jiun Chia & Shiok Ye Lim & Sheue Li Ong, 2014. "Long-Run Validity of Purchasing Power Parity and Cointegration Analysis for Low Income African Countries," Economics Bulletin, AccessEcon, vol. 34(3), pages 1438-1447.
  2. Albert Makochekanwa, 2007. "Zimbabwe’s Black Market for Foreign Exchange," Working Papers 200713, University of Pretoria, Department of Economics.

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