BLACK MARKET AND OFFICIAL EXCHANGE RATES:LONG-RUN EQUILIBRIUM AND SHORT-RUN DYNAMICS

Guglielmo Maria Caporale () and Mario Cerrato

Economics and Finance Discussion Papers from Economics and Finance Section, School of Social Sciences, Brunel University

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.

New Economics Papers: this item is included in nep-ifn and nep-reg
Date: 2005-03
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Related works:
Working Paper: BLACK MARKET AND OFFICIAL EXCHANGE RATES:LONG-RUN EQUILIBRIUM AND SHORT-RUN DYNAMICS (2005)
Working Paper: Black Market and Official Exchange Rates: Long-Run Equilibrium and Short-Run Dynamics (2006)
Journal Article: Black Market and Official Exchange Rates: Long-run Equilibrium and Short-run Dynamics (2008)
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