Regime Switching and the Black Market for Foreign Currency

This paper demonstrates the importance of allowing for regime switching when investigating the behavior of the parallel market premium. Regime switching techniques are used to examine the credibility of a ...xed exchange regime in economies with widespread parallel markets for foreign currency. Markov regime switching techniques used in this paper were developed in Hamilton (1989), Gray (1996) and, Diebold et al (1994). Application of this technique to the parallel market premium in Jamaica, Guyana and Trinidad for 1985-1993 suggests that exchange rate reforms Jamaica in the early 1990’s were credibility enhancing while those in Guyana and Trinidad did not enhance credibility.