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Black Market Exchange Rate versus the Official Rate in Testing the PPP: An Application of a Non-Linear Test

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  • Mohsen Bahmani-Oskooee

    (The Center for Research on International Economics and The Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, WI 53201, USA.)

  • Altin Tanku

    (The Center for Research on International Economics and The Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, WI 53201, USA.)

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

Suggested Citation

  • Mohsen Bahmani-Oskooee & Altin Tanku, 2007. "Black Market Exchange Rate versus the Official Rate in Testing the PPP: An Application of a Non-Linear Test," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(4), pages 632-641, December.
    • Handle: RePEc:pal:compes:v:49:y:2007:i:4:p:632-641
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    Cited by:

    1. Mohsen Bahmani‐Oskooee & Scott W. Hegerty, 2009. "Purchasing Power Parity In Less‐Developed And Transition Economies: A Review Paper," Journal of Economic Surveys, Wiley Blackwell, vol. 23(4), pages 617-658, September.

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