Do the black market and the official exchange rates converge in the long run?

Mohsen Bahmani-Oskooee and Altin Tanku ()

Journal of Economics and Finance, 2006, vol. 30, issue 1, 57-69

Abstract: Establishing cointegration and long-run convergence between the official and the black market exchange rates is a way of testing foreign exchange market efficiency. Earlier research employed the Engle-Granger or Johansen method to test for cointegration between the two rates. Since either method requires each rate to be non-stationary, exchange rates that did not possess this property had to be excluded from analysis. However, with the introduction of the bounds testing approach to cointegration, no exchange rate needs to be excluded since this relatively new technique does not require pre-unit root testing. This paper employs monthly data from 27 developing countries and the bounds testing approach to cointegration by Pesaran et al. (2001) to show that in 22 out of 27 countries, not only are the two rates cointegrated but in all countries the black market exchange rate causes the official rate to adjust and converge toward the black market rate in the long run. Copyright Academy of Economics and Finance 2006

Date: 2006
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DOI: 10.1007/BF02834275

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