The Behavior of Black Market and Official Exchange Rates in Latin America - A Cointegration Analysis

Abstract

The behavior of black market and official exchange rates is examined for ten Latin American countries using cointegration analysis. Only three of fifteen possible pairs of black n1arket currencies are cointegrated. Adjustlnent of cross-country black market rates for Paraguay, Venezuela, Mexico, and El Salvador takes place at significant lags according to an error correction model (ECM). The potential for a pennanent misalignu1ent between the black market and official exchange rates in Chile, Paraguay and Venezuela is also found. In contrast, the black market and official exchange rates of Costa Rica and El Salvador are apparently tied together in a long-run cointegrating relationship. (F31)