Does purchasing power parity hold in emerging markets? Evidence from a panel of black market exchange rates

We examine the purchasing power parity (PPP) hypothesis using a unique panel of monthly data on black market exchange rates for 34 emerging market economies. We apply a large number of recent heterogeneous panel unit root and cointegration tests. Panel unit root tests reject mean reversion in black market real exchange rates for most (but not all) emerging market economies. On the other hand, all panel cointegration tests provide strong evidence of cointegration between the nominal black market exchange rate and domestic and foreign prices for both individual countries and the full panel. Since we believe that the findings from unit root tests may be affected by the imposition of the joint symmetry and proportionality restriction due to trade restrictions and measurement errors, we test for such a restriction using likelihood ratio tests and find that it is strongly rejected. Copyright © 2007 John Wiley & Sons, Ltd.