Efficiency of the black market for foreign exchange and PPP: the case of the Dominican Republic

Abstract

Efficiency of the black market for foreign exchange in a developing country can be assessed by testing whether that market complies with the 'relative' version of the purchasing power parity hypothesis. This paper applies nonstationarity and cointegration to investigate this hypothesis for the Dominican Republic. Both the Engle-Granger and Johansen techniques support cointegration, so the black market for foreign exchange in the Dominican Republic is efficient.

Inflation Dynamics in the Dominican Republic

“…Based on the trace test, the hypothesis that there exists at most one cointegrating vector cannot be rejected. These results concur with those of Sánchez-Fung (1999), who explored this relationship using quarterly data over a longer-time period. The long-run relationship among the exchange rate, domestic and foreign prices 8 can be written as:…”

“…The study builds on empirical work on the Dominican Republic done by Sánchez-Fung (1999) and Tanner (2001), who investigated the validity of purchasing power parity (PPP) in explaining price developments, while Nadal-De Simone (2001) and Carruth and Sánchez-Fung (2000) examined the role of the money market. The current paper adds to the body of work on price dynamics in the Dominican Republic by jointly exploring the effects of disequilibria in the money and traded-goods markets on inflation, aside from other macroeconomic variables that could potentially influence inflation.…”

Efficiency of Foreign Exchange Markets: A Developing Country Perspective

“…These methodologies have mainly aimed at determining whether (a) a spot exchange rate behaves as a random walk (Liu & He, 1991;Bleaney, 1998), (b) the forward exchange rate is an unbiased predictor of future spot exchange rate (Norrbin & Refferett, 1996;Wesso, 1999;Barnhart, McNown, & Wallace, 1999;Zacharatos & Sutcliff, 2002) or (c) whether there is a cointegrating relationship among a set of spot exchange rates (Masih & Masih, 1996;Sanchez-Fung, 1999;Speight & McMillan, 2001). This paper adopts Engle and Granger (EG) (1987) and Johansen (1991Johansen ( , 1995 cointegration tests.…”

Black and official market exchange rates and purchasing power parity: evidence from Latin America

“…For more details see Allen and Taylor (1990), Kilian and Taylor (2003), Taylor (2004), Menkhoff and Taylor (2007) and Reitz and Taylor (2008). 4 They include Culbertson (1975), Phillip (1988), Bahmani-Oskooee (1993), El-Sakka and McNaab (1994), Baghestani (1997), Sanchez-Fung (1999), Luintel (2000), Bahmani-Oskooee and Goswami (2005) and Bahmani-Oskooee and Tanku (2007). For a comprehensive review of these studies and other PPP-related studies in all developing countries see Bahmani-Oskooee and Hegerty (2009).…”