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Black Market Exchange Rates and Purchasing Power Parity in Emerging Economies

Testing purchasing power parity (PPP) in the black market has increased in recent years due to the apparent puzzle in the literature by which PPP is largely rejected in flexible exchange rate regimes. Many studies of PPP suffer from the problem of imposing symmetry and proportionality restriction and fail to address the issues of stationarity and exogeneity. We address these issues in this paper by using monthly data from eight developing Asian countries over a thirty-one-year period. Even though the variables are cointegrated in a Johansen-Juselius framework, it is found that the domestic price and the foreign price are not weakly exogenous in many countries, and a direct test provides the rejection of the PPP hypothesis.