Black and Official Exchange Rates in Latin America : An Analysis of Their Long-Run Dynamics

This paper analyzes the long-run dynamic relationship between black and official exchange rates for four Latin America namely, Argentina, Brazil, Chile and Mexico over the period 1971-1993. We apply Johansen's (1992a, 1995, 1997) recent methodology to the joint hypothesis of cointegration rank and the presence of I(2) and I(1) components along with the estimation of the roots of the companion matrix (Juselius, 1995) and we find evidence of one long-run relationship between the black and official exchange rate, for any country. We also show that the long-run proportionality hypothesis between the two exchange rates could not be rejected, which implies the existence of a constant long-run black-market premium, for all cases. When the premium deviates from its long-run value, the black-market rate adjusts to eliminate the deviation and the speed of adjustment is quite large. Further tests suggest that there is weak-form informational inefficiency in the black markets, which may be due, in part, to the transaction costs and the tight administrative controls over foreign currency applied in these Latin American countries. The results have implications for managing exchange-rate risk and for possible arbitrage opportunities in these markets