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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. Copyright © 2010 The Authors. The Manchester School © 2010 Blackwell Publishing Ltd and The University of Manchester.

Suggested Citation

  • 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
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