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

A group of studies have shown that in less developed countries, Purchasing Power Parity (PPP) theory is supported more often when black market exchange rates rather than official rates are used in the testing procedure. They have all relied upon linear Augmented Dickey-Fuller (ADF) test applied either to the residuals of a cointegrating vector or to real exchange rates. In this article, we use a nonlinear ADF test and show that when nonlinearity is incorporated in the testing procedure, the nonlinear tests support PPP more often than the linear test regardless of whether we use official or black market exchange rate. Besides, for the post-Bretton Woods period, PPP is almost equally supported using either the black market exchange rates or the official rates.