Relationship between the official and the black economy exchange rate in Latin America
Keywords:
Black market, Exchange rates, Panel cointegration, Financial crisisAbstract
The recent implementation of foreign exchange restrictions in Argentina and Venezuela leads us to reconsider the history of foreign exchange controls in Latin-America. The aim of this paper is to analyse the effectiveness of these controls in preventing sudden devaluations in the official rate. The analysis uses a simple portfolio model and an econometric test is proposed that uses panel cointegration techniques to explore the relationship between official and black market rates. It was found that the official and the black market rates are cointegrated, and that mainly the official exchange rate is usually adjusted when there is a disequilibrium. This suggests that foreign exchange controls in Latin-America were not an effective tool to avoid large and abrupt devaluations.
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