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Black Market And Official Exchange Rates:Long-Run Equilibrium And Short-Run Dynamics

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  • Guglielmo Maria Caporale
  • Mario Cerrato

Abstract

This paper provides further empirical results on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relation between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, in addition to the long-run equilibrium, it also analyses the short-run dynamic responses of both markets to shocks. Evidence of market inefficiency and incomplete (or longlived) reversion to long-run equilibrium is found. This implies that financial managers can only partially reduce the exchange rate risk, whilst monetary authorities can effectively pursue their policy objectives by imposing foreign exchange or direct controls.

Suggested Citation

  • Guglielmo Maria Caporale & Mario Cerrato, 2005. "Black Market And Official Exchange Rates:Long-Run Equilibrium And Short-Run Dynamics," Public Policy Discussion Papers 05-04, Economics and Finance Section, School of Social Sciences, Brunel University.
    • Handle: RePEc:bru:bruppp:05-04
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    7. 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.

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