With dual exchange rates, where a managed official exchange rate coexists with a floating black market rate, a given budget deficit may be consistent with many different inflation rates rather than two, which is the normal result in closed economy systems. Further, all these inflation equilibria are saddle-point stable. A policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high-inflation, saddle-point stable equilibrium where money inflation elasticity exceeds unity. The analytics are motivated and illustrated by the Bolivian hyperinflation of 1984-85. Copyright 1989 by The Review of Economic Studies Limited.
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