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Dual Exchange Rates in the Presence of Incomplete Market Separation: Long-Run Effectiveness and Policy Implications

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  • Daniel Gros

    (International Monetary Fund)

Abstract

The literature on dual exchange rate regimes assumes that the separation between the two foreign exchange markets is perfect. In this paper a divergence between the two exchange rates induces a flow of arbitrage activity, the magnitude of which depends on both the costs of evading exchange controls and the size of the exchange rate differential. These arbitrage flows lead to a gradual convergence of the two exchange rates. In the long run, therefore, a dual exchange rate regime with a fixed commercial rate imposes the same constraints as a fixed unified exchange rate.

Suggested Citation

  • Daniel Gros, 1988. "Dual Exchange Rates in the Presence of Incomplete Market Separation: Long-Run Effectiveness and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 437-460, September.
  • Handle: RePEc:pal:imfstp:v:35:y:1988:i:3:p:437-460
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    Cited by:

    1. Wen-ya Chang & Ching-chong Lai, 1998. "The dynamic unsubstitutability of sterilization operations and neutral-intervention operations under dual exchange rates," Journal of Economics, Springer, vol. 68(3), pages 235-253, October.
    2. Mikesell, Raymond F., 2001. "Dual Exchange Markets for Countries Facing Financial Crises," World Development, Elsevier, vol. 29(6), pages 1035-1041, June.
    3. Fuhmei Wang, 2009. "Financial Distortions and Economic Growth: Empirical Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(3), pages 56-66, May.
    4. Robert Flood & Nancy Marion, 1989. "Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium," NBER Working Papers 3015, National Bureau of Economic Research, Inc.
    5. Hanson, James A., 1992. "Opening the capital account : a survey of issues and results," Policy Research Working Paper Series 901, The World Bank.
    6. Fuhmei Wang, 2009. "Financial Distortions and Economic Growth: Empirical Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 45(3), pages 56-66, May.
    7. Paul Reding & Jean-Marie Viaene, 1995. "Capital controls and international trade finance in a dual exchange rate regime: The Belgian experience post-mortem," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 131(1), pages 1-27, March.

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