Long-run Nature of the Relationship between the Black Market and the Official Exchange Rates

Abstract

Previous research that investigated the relationship between the black market and the official exchange rate employed cointegration analysis to establish the long-run relationship and Granger causality to detect the short-run causality between the two rates (for a small number of countries). In this paper, we employ annual data over the 1955-1995 period from 31 developing countries to show that indeed in most cases the two rates are cointegrated. Application of Johansen's weak exogeneity test reveals that in the majority of the countries, the black market exchange rate is weakly exogenous, supporting the argument that in the long-run depreciation of domestic currency in the black market induces government officials to devalue the domestic currency and unify the two rates.