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
Date Written: February 14, 2010
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: Suggested Citation