Black and official exchange rate volatility and foreign exchange controls:Evidence from Greece

This paper examines the issue of volatility and capital controls to the off icial and black market exchange rates of the creek Drachma using the monthl y exchange rate against the US dollar for the period 1975-1993. Specificall y, we apply a GARCH(1, 1) model to study the behaviour of the official and black market drachma/dollar exchange rate. The main findings of the analysi s are: (i) in contrast to the findings of previous studies using monthly ra tes, GARCH processes characterize the drachma/dollar exchange rate series i n both markets; (ii) the relaxation of foreign exchange controls increased the volatility of the exchange rate in the official market as implied by th eory; (iii) the persistence of volatility is reduced when account is taken of the liberalization process of capital movements; and (iv) The forecasts of volatility are improved when the GARCH forecasts are used against tradit ional measures. Copyright (C) 2001 John Wiley & Sons, Ltd.