The Limited Viability of Dual Exchange-Rate Regimes
This paper examines the viability of dual exchange-rate regimes. Typically, under such a regime the exchange rates applicable to current-account(commercial) transactions and to capital-account (financial) transactions differ from each other. This difference may be determined in the free market if the authorities peg the commercial exchange rate and set a binding quota on external borrowing, or it may result from direct pegging of both exchange rates. The analysis starts with a specification of the characteristics of the distortion introduced by the exchange-rate premium (that is, the percentage discrepancy between the financial and the commercial exchange rates), and then provides explicit formula for the equilibrium premium, for its evolution over time and for the welfare cost induced by the distortion. The paper outlines the set of policy options consistent with sustaining a permanently viable dual exchange-rate system and highlights the severe constraints that intertemporal solvency requirements of the private sector and of the government impose on the long-run viability of the regime. The paper concludes with an analysis of the monetary changes associated with dual exchange-rate policies and draws the implications of such a regime for the intertemporal distribution of taxes and for the intergenerational distribution of welfare.
|Date of creation:||Apr 1986|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan C. Stockman, 1978.
"A Theory of Exchange Rate Determination,"
UCLA Economics Working Papers
113, UCLA Department of Economics.
- Jeremy Greenwood & Kent P. Kimbrough, 1987. "An Investigation in the Theory of Foreign Exchange Controls," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 271-88, May.
- Stockman, Alan C., 1982. "The order of economic liberalization: lessons from Chile and Argentina : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 187-192, January.
- Brian A. Jacob & Lars Lefgren, 2009.
"The Effect of Grade Retention on High School Completion,"
American Economic Journal: Applied Economics,
American Economic Association, vol. 1(3), pages 33-58, July.
- Brian Jacob & Lars Lefgren, 2007. "The Effect of Grade Retention on High School Completion," NBER Working Papers 13514, National Bureau of Economic Research, Inc.
- McKinnon, Ronald I., 1982. "The order of economic liberalization: Lessons from Chile and Argentina," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 159-186, January.
- Helpman, Elhanan, 1981.
"An Exploration in the Theory of Exchange-Rate Regimes,"
Journal of Political Economy,
University of Chicago Press, vol. 89(5), pages 865-90, October.
- Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
- Flood, Robert P., 1978. "Exchange rate expectations in dual exchange markets," Journal of International Economics, Elsevier, vol. 8(1), pages 65-77, February.
- Sebastian Edwards & Liaquat Ahamed, 1986. "Economic Adjustment and Exchange Rates in Developing Countries," NBER Books, National Bureau of Economic Research, Inc, number edwa86-1, December.
- Frenkel, Jacob A., 1982. "The order of economic liberalization: Lessons from Chile and Argentina : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17(1), pages 199-201, January.
- Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
- Marion, Nancy Peregrim, 1981. "Insulation Properties of a Two-Tier Exchange Market in a Portfolio Balance Model," Economica, London School of Economics and Political Science, vol. 48(189), pages 61-70, February.
- Olivier J. Blanchard, 1984.
"Debt, Deficits and Finite Horizons,"
NBER Working Papers
1389, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1976.
" The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 78(2), pages 255-75.
- R. Dornbusch, 1975. "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Working papers 165, Massachusetts Institute of Technology (MIT), Department of Economics.
- Maurice Obstfeld, 1984.
"Capital Controls, The Dual Exchange Rate, and Devaluation,"
NBER Working Papers
1324, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
- Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
- Aizenman, Joshua, 1985.
"Adjustment to monetary policy and devaluation under two-tier and fixed exchange rate regimes,"
Journal of Development Economics,
Elsevier, vol. 18(1), pages 153-169.
- 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.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1902. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.