Black Market and Official Exchange Rates: Long-Run Equilibrium and Short-Run Dynamics

12 Pages Posted: 14 Jul 2008

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

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Abstract

This paper presents further empirical evidence 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 relationship between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, it also analyses the short-run dynamic responses of both markets to shocks. Finally, it tries to shed some light on the determinants of the market premium. Evidence of slow reversion to the long-run equilibrium is found. Further, it appears that capital controls and expected currency devaluation are the two main factors affecting the size of the premium and determining the breakdown in the proportionality relationship.

Suggested Citation

Caporale, Guglielmo Maria and Cerrato, Mario, Black Market and Official Exchange Rates: Long-Run Equilibrium and Short-Run Dynamics. Review of International Economics, Vol. 16, Issue 3, pp. 401-412, August 2008. Available at SSRN: https://ssrn.com/abstract=1158791 or http://dx.doi.org/10.1111/j.1467-9396.2007.00709.x

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
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CESifo (Center for Economic Studies and Ifo Institute)

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German Institute for Economic Research (DIW Berlin) ( email )

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Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

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