THE OFFICIAL AND BLACK (PARALLEL) FOREIGN EXCHANGE MARKETS: CAUSAL RELATIONSHIPS: EMPIRICAL EVIDENCE

Abbas Noorbakhsh and Manuchehr Shahrokhi

Governments often resort to foreign exchange controls to protect their holdings of hard currencies and insulate their economies from cross-border capital movements. Even though such controls remain viable policy instrument, especially in the LDCs, they create black or parallel exchange markets. Despite their thin trading, illegality, and the absence of formal exchanges, empirical studies (Gupta [10] and Noorbakhsh [20]) indicate that the black exchange markets are weak form efficient.
Using monthly data of the official and black exchange rate series for 12 countries during the 1968-85 period, this paper empirically tests the causal (Granger's [8]) and cross correlations between the official and black exchange markets. We document that in many countries changes in the black market rates lead to changes in the official rates and not vice versa.