Black market exchange rates challenge Purchasing Power Parity in emerging markets.
The article examines if the Purchasing Power Parity (PPP) holds in emerging markets by studying black market exchange rates from 1993. The researchers found that the real black market exchange rate does not show mean reversion, even after considering structural breaks. However, there is evidence of a relationship between the nominal exchange rate and relative prices. This contradicts the results from unit root tests, which were biased by certain restrictions that were later rejected.