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Special Exchange Rates for Capital Account Transactions

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  • Dornbusch, Rudiger

Abstract

The exchange rate consistent with high employment and a balanced current account are rarely the same as the rates consistent with asset market equilibrium at interest rates policy makers wish to prevail. Whenever rates are freely determined the assets markets prevail and the results may be hard to live with, or at least harder than would appear to be the case of special exchange rates and capital controls which are used to isolate home assets markets from the world capital market. This paper investigates the motive for choosing capital controls and special exchange rates, the principal forms and some of the experience. We look in particular at three institutional arrangements:(1) dual exchange rates separating current and capital account transactions,(2) black or parallel markets for foreign exchange,(3) exchange rate guarantees, dollar deposits and dollar-linked domestic debt.
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Suggested Citation

  • Dornbusch, Rudiger, 1986. "Special Exchange Rates for Capital Account Transactions," World Bank Economic Review, World Bank Group, vol. 1(1), pages 3-33, September.
  • Handle: RePEc:oup:wbecrv:v:1:y:1986:i:1:p:3-33
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