Purchasing power parity in the presence of foreign exchange black markets: the case of India

Hamid Baghestani

Applied Economics, 1997, vol. 29, issue 9, 1147-1154

Abstract: The empirical validity of $b;PPP$eb; as a long-run constraint between India and the US is examined in the preesence of foreign exchange black markets. In a triariate model, the official exchange rate is found to be coinergrated with both the price ratio and the black market exchange rate. Both the official exchange rate and price ratio respond to correct short-run departures from $b;PPP$eb;. Also, both the official and the black market exchange rates respond to correct departures from their own equilibrium relation. The two sources of endogeneity in the official rate follow rate follow as Indian authorities aimed to stabilize domestic prices and reduce uncertainty about the dollar price of rupees.

Date: 1997
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DOI: 10.1080/00036849700000005

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