Machine summary:
")* Abstract: In this study validity of purchasing power parity (PPP) to the official and black market exchange rates in Iran for the pre and post revolution periods is investigated.
Bahmani-Oskooee (1993) reports that purchasing Power Parity appears to be a valid model of the black market rate but not of the official exchange rate.
In the official market adjustments of the nominal exchange rate were rare in the pre-revolution period, and so data on (eot will be dominated by zeros1.
4- Results 4-1- Strong Purchasing Power Parity If the exchange rate adjusts to restore the real rate to the equilibrium value, then e* is given by the ratio of domestic to foreign prices, pd - pf.
We test for relative Purchasing Power Parity by running regressions such as: , (8) and for the pre-revolution official exchange rate: , (9) Relative PPP requires that (ij ( 0, and (ij / (1-(j) = 1 in the case of equation (9) and (ij = 1 in equation (10).
After the revolution, this only applies to the black market, the official rate seems to respond to short term inflation movements but not to long run movements in the real exchange rate.
4-3-1- Pre-revolution: (16) (17) 4-3-2- Post-Revolution: (18) 5- Conclusion We have shown that Purchasing Power Parity (PPP) is a relevant model of the determination of the black market exchange rate in Iran both before and after the revolution."