Black Market and Official Exchange Rates: Long-Run Equilibrium and Short-Run Dynamics
AbstractThis 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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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1851.
Date of creation: 2006
Date of revision:
black market and official exchange rates; panel cointegration; impulse response functions;
Other versions of this item:
- Guglielmo Maria Caporale & Mario Cerrato, 2008. "Black Market and Official Exchange Rates: Long-run Equilibrium and Short-run Dynamics," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 401-412, 08.
- Guglielmo Maria Caporale & Mario Cerrato, 2005. "Black Market And Official Exchange Rates:Long-Run Equilibrium And Short-Run Dynamics," Public Policy Discussion Papers 05-04, Economics and Finance Section, School of Social Sciences, Brunel University.
- Guglielmo Maria Caporale & Mario Cerrato, 2005. "Black Market And Official Exchange Rates:Long-Run Equilibrium And Short-Run Dynamics," Economics and Finance Discussion Papers 05-04, Economics and Finance Section, School of Social Sciences, Brunel University.
- NEP-ALL-2007-01-02 (All new papers)
- NEP-CBA-2007-01-02 (Central Banking)
- NEP-IFN-2007-01-02 (International Finance)
- NEP-SEA-2007-01-02 (South East Asia)
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