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The Black‐Market Exchange Rate Versus The Official Rate: Which Rate Fosters The Adjustment Speed In The Monetarist Model?

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  • MOHSEN BAHMANI‐OSKOOEE
  • SCOTT W. HEGERTY
  • ALTIN TANKU

Abstract

Many less developed countries have currency controls, which can lead to black‐market trade and cause distortions in the exchange market. We test the flexible‐price monetary model for 25 less developed countries, using both official and black‐market exchange rates. We find that the model is supported in the long run, particularly when black‐market rates are used. Measuring the speed of convergence to equilibrium, we find that it is often higher in the black‐market specification, implying greater efficiency. This could offer justification for exchange‐rate unification, particularly in Latin America.

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  • Mohsen Bahmani‐Oskooee & Scott W. Hegerty & Altin Tanku, 2010. "The Black‐Market Exchange Rate Versus The Official Rate: Which Rate Fosters The Adjustment Speed In The Monetarist Model?," Manchester School, University of Manchester, vol. 78(6), pages 725-738, December.
    • Handle: RePEc:bla:manchs:v:78:y:2010:i:6:p:725-738
    DOI: 10.1111/j.1467-9957.2009.02164.x
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    3. Xie, Zixiong & Chen, Shyh-Wei, 2019. "Exchange rates and fundamentals: A bootstrap panel data analysis," Economic Modelling, Elsevier, vol. 78(C), pages 209-224.

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