Testing Black Market vs. Official PPP: A Pooled Mean Group Estimation Approach

Testing purchasing power parity (PPP) using black market exchange rate data has gained popularity in recent times. It is claimed that black market exchange rate data more often support the PPP than the official exchange rate data. In this study, to assess both the long run stability of exchange rate and the short run dynamics, we employ Pooled Mean Group (PMG) Estimation developed by Pesaran et al. (1999) on eight groups of countries based on different criteria. Using the famous Reinhart and Rogoff (2002) dataset on black market exchange rate in the framework of Bahmani-Oskooee and Goswami (2005), the results are in sharp contrast with the most recent studies. We find very weak and insufficient support for the PPP using both the black market and the official exchange rate data. The assumption of long run homogeneity is also invalidated for some groups. Therefore, the results of PPP testing are not conclusive even though we switch from the official rate to the black market rate for a global data set. The finding holds even though we swap static panel for dynamic heterogeneous panel in the light of PMG estimation.