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Foreign Exchange Controls, Fiscal and Monetary Policy, and the Black Market Premium

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  • Mohsen Fardmanesh
  • Seymour Douglas
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    Abstract

    This paper examines the relationship between the official and parallel exchange rates, in three Caribbean countries, Guyana, Jamaica and Trinidad, during the 1985-1993 period using cointegration, Granger causality, and reduced form methods. The official and parallel rates are cointegrated in all three countries, but with significant average disparity between them in Guyana and Trinidad, which unlike Jamaica applied infrequent and large adjustments to their official rates. The causation is bi-directional in the case of Jamaica and uni-directional, with changes in the official rate Granger causing changes in the parallel rate, in the cases of Guyana and Trinidad, reflecting the difference in their official exchange rate policies. Our reduced form estimates indicate that exchange controls, expansionary fiscal and monetary policy, and changes of government mostly have the expected positive effect on the black market premium. After past values of the premium, exchange controls exert the strongest impact on the premium.

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    Bibliographic Info

    Paper provided by Economic Growth Center, Yale University in its series Working Papers with number 876.

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    Length: 30 pages
    Date of creation: Dec 2003
    Date of revision:
    Handle: RePEc:egc:wpaper:876

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    Keywords: Foreign Exchange Controls; Black Market Exchange Rate; Black Market Premium; Cointegration; Granger Causality;

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    1. 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.
    2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    3. Kate Phylaktis & Yiannis Kassimatis, 1997. "Black and official exchange rate volatility and foreign exchange controls," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 15-24.
    4. Goldberg, Linda S., 1995. "Exchange rate regime reforms with black market leakages," Journal of Development Economics, Elsevier, vol. 48(1), pages 167-187, October.
    5. Nicholas Apergis, 2000. "Black Market Rates and Official Rates in Armenia: Evidence from Causality Tests in Alternative Regimes," Eastern Economic Journal, Eastern Economic Association, vol. 26(3), pages 335-344, Summer.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    7. Jun Nagayasu & E. Gelbard, 1999. "Determinants of Angola's Parallel Market Real Exchange Rate," IMF Working Papers 99/90, International Monetary Fund.
    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
    9. Pierre-Richard Agénor & Robert P. Flood, 1992. "Unification of Foreign Exchange Markets," IMF Staff Papers, Palgrave Macmillan, vol. 39(4), pages 923-947, December.
    10. 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.
    11. Noorbakhsh, Abbas & Shahrokhi, Manuchehr, 1993. "The official and black (parallel) foreign exchange markets: Causal relationships: Empirical evidence," Global Finance Journal, Elsevier, vol. 4(1), pages 65-76.
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