Is Black Market Exchange Rate a Good Indicator of Equilibrium Exchange Rate? A Simple Test with Evidence from South Asia

9 Pages Posted: 15 Feb 2010

See all articles by M. Shahe Emran

M. Shahe Emran

George Washington University - Department of Economics

Forhad Shilpi

World Bank - Development Research Group (DECRG)

Date Written: February 14, 2010

Abstract

The black market exchange rate premium is widely used in the empirical literature as an indicator of trade and exchange rate distortions. This paper presents a simple test of the null hypothesis that the black market exchange rate is a reliable indicator of the equilibrium exchange rate. The evidence from India and Sri Lanka rejects the null and thus raises serious doubts about the validity of the current empirical practice.

Keywords: Black Market Exchange Rate, Premium, Equilibrium Exchange Rate, India, Sri Lanka

JEL Classification: F 31, F14, O24

Suggested Citation

Emran, M. Shahe and Shilpi, Forhad, Is Black Market Exchange Rate a Good Indicator of Equilibrium Exchange Rate? A Simple Test with Evidence from South Asia (February 14, 2010). Available at SSRN: https://ssrn.com/abstract=1552885 or http://dx.doi.org/10.2139/ssrn.1552885

M. Shahe Emran (Contact Author)

George Washington University - Department of Economics ( email )

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Washington, DC 20052
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Forhad Shilpi

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
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202-522-1151 (Fax)

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