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

19 Pages Posted: 5 Dec 2006

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)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

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.

Keywords: black market and official exchange rates, panel cointegration, impulse response functions

JEL Classification: C23, F31

Suggested Citation

Caporale, Guglielmo Maria and Cerrato, Mario, Black Market and Official Exchange Rates: Long-Run Equilibrium and Short-Run Dynamics (November 2006). CESifo Working Paper No. 1851. Available at SSRN: https://ssrn.com/abstract=949425

Guglielmo Maria Caporale (Contact Author)

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

Kingston Lane
Marie Jahoda Building
Uxbridge, Middlesex UB8 3PH
United Kingdom
+44 1895 266713 (Phone)
+44 1895 269770 (Fax)

HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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

Mohrenstra├če 58
Berlin, 10117
Germany

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
118
Abstract Views
885
rank
246,073
PlumX Metrics