No abstract

No abstract

No abstract

Due to foreign exchange controls in many developing countries, there is a black market for foreign exchange. Since the black market exchange rates are good proxies for the floating exchange rates, they provide relatively more support for the purchasing power parity theory (PPP). In this paper, we show that in a majority of the developing countries the adjustment of relative prices and the nominal black market exchange rate is on a non-linear stationary process, implying that the PPP holds even more when a non-linear test versus a linear test is employed in the analysis. Comparative Economic Studies (2007) 49, 632–641. doi:10.1057/palgrave.ces.8100215

Many less developed countries have currency controls, which can lead to black-market trade and cause distortions in the exchange market. We test the flexible-price monetary model for 25 less developed countries, using both official and black-market exchange rates. We find that the model is supported in the long run, particularly when black-market rates are used. Measuring the speed of convergence to equilibrium, we find that it is often higher in the black-market specification, implying greater efficiency. This could offer justification for exchange-rate unification, particularly in Latin America. Copyright � 2010 The Authors. The Manchester School � 2010 Blackwell Publishing Ltd and The University of Manchester.