The Black-Market Exchange Rate Versus the Official Rate: Which Rate Fosters the Adjustment Speed in the Monetarist Model?

Abstract

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.

The Exchange Rate Disconnect Puzzle Revisited

“…Bahmani‐Oskooee et al . () listed two conditions if one is to present empirical support for the monetary model of not to exchange rate determination; evidence of cointegration (long‐run co‐movement) between the exchange rate and fundamentals, as well as parameters showing the proper sign and significance in the long‐run relationship. The majority of studies to date have applied the Johansen () and Johansen and Juselius () approach to cointegration to test the different versions of the monetary exchange rate model.…”