Black Market Exchange Rate versus the Official Rate in Testing the PPP: An Application of a Non-Linear Test

Due to foreign exchange controls in many developing countries, there is a black market for foreign exchange. Since the black market exchange rates are good proxies for the floating exchange rates, they provide relatively more support for the purchasing power parity theory (PPP). In this paper, we show that in a majority of the developing countries the adjustment of relative prices and the nominal black market exchange rate is on a non-linear stationary process, implying that the PPP holds even more when a non-linear test versus a linear test is employed in the analysis. Comparative Economic Studies (2007) 49, 632–641. doi:10.1057/palgrave.ces.8100215