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Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes

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  • Joshua Aizenman

Abstract

The purpose of this paper is to determine whether a two-tier exchange rate regime is more effective than a fixed rate regime in increasing acountry's ability to pursue an independent monetary policy in the short run.The analysis compares adjustment to a monetary policy and to a devaluation in the two exchange rate regimes in a portfolio model under imperfect asset substitutability. It is shown that the two policies have in the short run larger effects on interest rates under a two-tier regime. The duration of this effect, however, is longer under a fixed rate regime. The analysis is conducted for the case of static and rational expectations, demonstrating that the above results do not depend on the expectation mechanism.

Suggested Citation

  • Joshua Aizenman, 1983. "Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes," NBER Working Papers 1107, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1107
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    References listed on IDEAS

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    1. Dornbusch, Rudiger, 1976. " The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 255-275.
    2. Kouri, Pentti J K & Porter, Michael G, 1974. "International Capital Flows and Portfolio Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 443-467, May/June.
    3. Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 43-66.
    4. Frenkel, Jacob A & Rodriguez, Carlos Alfredo, 1975. "Portfolio Equilibrium and the Balance of Payments: A Monetary Approach," American Economic Review, American Economic Association, vol. 65(4), pages 674-688, September.
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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. Aaron Tornell, 1990. "Propiedades aislantes de los tipos de cambio duales: Un modelo neoclásico," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 5(1), pages 125-156.
    3. Goldberg, Linda S., 1995. "Exchange rate regime reforms with black market leakages," Journal of Development Economics, Elsevier, vol. 48(1), pages 167-187, October.
    4. Sebastian Edwards & Peter J. Montiel, 1989. "Devaluation Crises and the Macroeconomic Consequences of Postponed Adjustment in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 875-903, December.
    5. Ching-chong Lai, 1990. "Exchange Rate Determination under Flexible and Two-Tier Exchange Rate Regimes," Eastern Economic Journal, Eastern Economic Association, vol. 16(2), pages 115-123, Apr-Jun.
    6. Edwards, Sebastian, 1988. "Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries," Journal of Development Economics, Elsevier, vol. 29(3), pages 311-341, November.
    7. Jacob A. Frenkel & Assaf Razin, 1986. "The Limited Viability of Dual Exchange-Rate Regimes," NBER Working Papers 1902, National Bureau of Economic Research, Inc.

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