On the Reliability of Black-Market Exchange Rate: Evidence from Algeria

Abstract

The existence of a well-defined and stable money demand function is an essential condition for conducting of an effective monetary policy. In Algeria, as is the case for most of developing countries, excessive control on foreign exchange leads to the emergence of black-market exchange rate. As a consequence, two exchange rates (official and black) coexist and operate simultaneously. The gap between the two rates has widened since the adoption of the structural adjustment program in 1994. Despite its negative impact on Algerian economy, this market has not, so far, attracted attention of researchers. Using an autoregressive distributed lag technique for a set of quarterly data going from 1990Q1- 2021Q4, we aim to investigate the effect of black-market exchange rate on the demand for money. Our results provide further evidence for the inclusion of the black rather than the official rate when drawing a monetary policy.