The black market exchange rate vs. the official rate in testing PPP: Which rate fosters the adjustment process?
In testing the purchasing power parity theory (PPP) researchers hardly pay attention to the speed with which the exchange rate adjusts to a change in relative prices. In this paper we show that the speed of adjustment is faster when the black market exchange rate is used in testing the PPP as compared to the official exchange rate. This could be another reason as to why central banks should unify the two rates.
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0307002, EconWPA, revised 01 Nov 2004.
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