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Time Consistency of Monetary Policy in Separating Exchange Markets

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  • Fuhmei Wang

    (Department of International Business Studies, National Chi-nan University)

Abstract

Though a dual exchange rate system might be a preferable intermediate step from a fixed to a flexible rate, the efficiency of such a regime depends on the complete separation between two markets. When government reneges on its announcement and changes the commercial rate, the time inconsistency of monetary policy arises. This event might result in incomplete separation, the instability of spread and hence the erosion of this management. This paper attempts to investigate the role of credibility in such a regime. It concludes that, for successfully separating exchange markets, government should fix the commercial exchange rate rather than change it.

Suggested Citation

  • Fuhmei Wang, 2001. "Time Consistency of Monetary Policy in Separating Exchange Markets," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(2), pages 17-32, December.
    • Handle: RePEc:jed:journl:v:26:y:2001:i:2:p:17-32
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    References listed on IDEAS

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