Black and official exchange rate volatility and foreign exchange controls

Autoregressive conditionally heteroscedastic (ARCH) and generalized ARCH (GARCH) models are applied to foreign currencies that are traded in both official and black markets using monthly rates in a group of Pacific Basin countries. It is shown that (i) in contrast to the observation of other studies using monthly rates, ARCH/GARCH processes characterize all exchange rate series in both markets; (ii) the relaxation of foreign exchange controls increased the volatility of exchange rates in official markets as implied by theoretical analysis; and (iii) the persistence of volatility is reduced when account is taken of the discrete change in policy on foreign exchange controls.