THE BLACK-MARKET EXCHANGE RATE VERSUS THE OFFICIAL RATE: WHICH RATE FOSTERS THE ADJUSTMENT SPEED IN THE MONETARIST MODEL?

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.