THE BLACK‐MARKET EXCHANGE RATE VERSUS THE OFFICIAL RATE: WHICH RATE FOSTERS THE ADJUSTMENT SPEED IN THE MONETARIST MODEL?

Mohsen Bahmani‐oskooee, Scott Hegerty and Altin Tanku ()
Authors registered in the RePEc Author Service: Mohsen Bahmani-Oskooee

Manchester School, 2010, vol. 78, issue 6, 725-738

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.

Date: 2010
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https://doi.org/10.1111/j.1467-9957.2009.02164.x

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