Determinants of the Official and Free Market Exchange Rates of Iran: An Explanation of the Black Market Premium

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. We find that strong PPP applies to the black market over both periods, but only applies to the official market before the revolution. After the revolution relative PPP can apply to the official market, but otherwise growth in either exchange rate seems unrelated to inflation differentials. The systematically rising black market premium since the revolution is explained by the failure of official rate which is in allignment with PPP and that there appears to be no relationship between the official and black market rates after the revolution.