THE BLACK-MARKET EXCHANGE RATE VERSUS THE OFFICIAL RATE: WHICH RATE FOSTERS THE ADJUSTMENT SPEED IN THE MONETARIST MODEL? The Manchester School Black-market Exchange Rate vs. Official Rate.

Many less developed countries have currency controls, which can lead to black-market trade and cause distortions in the exchange market. We test the flexible-price monetary model for 25 less developed countries, using both official and black-market exchange rates. We find that the model is supported in the long run, particularly when black-market rates are used. Measuring the speed of convergence to equilibrium, we find that it is often higher in the black-market specification, implying greater efficiency. This could offer justification for exchange-rate unification, particularly in Latin America. [ABSTRACT FROM AUTHOR]