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 official and black market exchange rates of the Greek Drachma using the monthly exchange rate against the US dollar for the period 1975-1993. Specifically, we apply a GARCH(1,1) model to study the behaviour of the official and black market drachma/dollar exhange rate. The main findings of the analysis are: (i) in contrast to the findings of previous studies using monthly rates, GARCH processes characterize the drachma/dollar exchange rate series in both markets; (ii) the relaxation of foreign exchange controls increased the volatility of the exchange rate in the official market as implied by theory; (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 traditional measures. Copyright © 2001 John Wiley & Sons, Ltd.