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The Relationship Between The Black Market And Official Exchange Rates: An Examination Of Long‐Run Dynamics In India

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  • Jim Love
  • Ramesh Chandra

Abstract

This study is the first to use Johansen's cointegration approach for India in the analysis of the long‐term dynamics between the black and official exchange rates for the period 1953–1993. The study also estimates the long‐run elasticity of the official rate with respect to the black market rate. As monthly data over 40 years are used, and a more robust methodology is employed, the results are likely to be more reliable as compared with the earlier work on India. The results of our study suggest that while there is a long‐term relationship between the two rates, the direction of causality is from the black rate to the official exchange rate. This is plausible in the Indian context where policy has generally lagged behind events in the black market. The hypothesis of a constant black market premium is rejected, implying that there is a mismatch between the percentage change in the official exchange rate and the percentage change in the black market rate.

Suggested Citation

  • Jim Love & Ramesh Chandra, 2007. "The Relationship Between The Black Market And Official Exchange Rates: An Examination Of Long‐Run Dynamics In India," Scottish Journal of Political Economy, Scottish Economic Society, vol. 54(2), pages 283-294, May.
    • Handle: RePEc:bla:scotjp:v:54:y:2007:i:2:p:283-294
    DOI: 10.1111/j.1467-9485.2007.00415.x
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    1. Jagdish N. Bhagwati & T. N. Srinivasan, 1975. "Foreign Trade Regimes and Economic Development: India," NBER Books, National Bureau of Economic Research, Inc, number bhag75-1, March.
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    Cited by:

    1. Sovannroeun Samreth, 2010. "A Note on Short-Run and Long-Run Relationships between Parallel and Official Exchange Rates: The Case of Cambodia," Economics Bulletin, AccessEcon, vol. 30(2), pages 1044-1053.
    2. Ferit Kula & Alper Aslan & lhan zt rk, 2014. "Long Run Tendencies and Short Run Adjustments Between Official and Black Market Exchange Rates in MENA Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 4(3), pages 494-500.

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