IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/1902.html
   My bibliography  Save this paper

The Limited Viability of Dual Exchange-Rate Regimes

Author

Listed:
  • Jacob A. Frenkel
  • Assaf Razin

Abstract

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.

Suggested Citation

  • Jacob A. Frenkel & Assaf Razin, 1986. "The Limited Viability of Dual Exchange-Rate Regimes," NBER Working Papers 1902, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1902
    Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w1902.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-698, August.
    2. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
    3. 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.
    4. 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.
    5. 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.
    6. repec:bla:econom:v:48:y:1981:i:189:p:61-70 is not listed on IDEAS
    7. 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 271-288, May.
    8. repec:bla:scandj:v:78:y:1976:i:2:p:255-75 is not listed on IDEAS
    9. 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.
    10. 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.
    11. Sebastian Edwards & Liaquat Ahamed, 1986. "Economic Adjustment and Exchange Rates in Developing Countries," NBER Books, National Bureau of Economic Research, Inc, number edwa86-1.
    12. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-890, October.
    13. 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.
    14. 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.
    15. Flood, Robert P., 1978. "Exchange rate expectations in dual exchange markets," Journal of International Economics, Elsevier, vol. 8(1), pages 65-77, February.
    16. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lukas Mohler & Michael Seitz, 2012. "The gains from variety in the European Union," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(3), pages 475-500, September.
    2. Dudley Cooke, 2007. "How do Capital Controls Affect the Transmission of Foreign Shocks?," EPRU Working Paper Series 07-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frankel, Jacob A. & Razin, Assaf, 1985. "Aspects of Dual Exchange-Rate Regimes," Foerder Institute for Economic Research Working Papers 275395, Tel-Aviv University > Foerder Institute for Economic Research.
    2. Frenkel, Jacob A. & Razin, Assaf, 1989. "Exchange-rate management viewed as tax policies," European Economic Review, Elsevier, vol. 33(4), pages 761-781, April.
    3. Stockman, Alan C & Hernandez D, Alejandro, 1988. "Exchange Controls, Capital Controls, and International Financial Markets," American Economic Review, American Economic Association, vol. 78(3), pages 362-374, June.
    4. 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.
    5. Pertti Haaparanta, 1986. "Dual Exchange Markets and Intervention," WIDER Working Paper Series wp-1986-006, World Institute for Development Economic Research (UNU-WIDER).
    6. Joshua Aizenman, 1986. "On the Complementarity of Commercial Policy, Capital Controls, and Inflation Tax," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 114-133, February.
    7. Dudley Cooke, 2007. "How do Capital Controls Affect the Transmission of Foreign Shocks?," EPRU Working Paper Series 07-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    8. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Other publications TiSEM e01fa769-96e8-4c5e-b9b5-a, Tilburg University, School of Economics and Management.
    9. Pasula, Kit, 1997. "Monetary Non-Neutrality and the Intertemporal Approach to the Balance of Trade: The UK Trade Balance under Bretton Woods," Review of International Economics, Wiley Blackwell, vol. 5(3), pages 333-347, August.
    10. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 245-262, February.
    11. Backus, David K. & Kehoe, Patrick J., 1989. "On the denomination of government debt : A critique of the portfolio balance approach," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 359-376, May.
    12. Battle, Ann Marie, 1997. "Welfare effects of liberalization reforms with distortions in financial and labor markets," Journal of Development Economics, Elsevier, vol. 52(2), pages 279-294, April.
    13. Roman Frydman & Michael D. Goldberg & Søren Johansen & Katarina Juselius, 2008. "A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings," Discussion Papers 08-31, University of Copenhagen. Department of Economics.
    14. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Anticipated Ramsey Reforms and the Uniform Taxation Principle: the Role of International Financial Markets," Departmental Working Papers 200210, Rutgers University, Department of Economics.
    15. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
    16. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-123, March.
    17. Rodolfo Cermeño & María Eugenia Sanin, 2015. "Are Flexible Exchange Rate Regimes more Volatile? Panel GARCH Evidence for the G7 and Latin America," Review of Development Economics, Wiley Blackwell, vol. 19(2), pages 297-308, May.
    18. Goldberg, Linda S., 1995. "Exchange rate regime reforms with black market leakages," Journal of Development Economics, Elsevier, vol. 48(1), pages 167-187, October.
    19. Alan C. Stockman, 1985. "Effects of Inflation on the Pattern of International Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 587-601, August.
    20. Kaufmann, Daniel & O'Connell, Stephen, 1996. "The Macroeconomics Of Delayed Exchange Rate Unification: Theory And Evidence From Tanzania," Harvard Institute for International Development (HIID) Papers 294377, Harvard University, Kennedy School of Government.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1902. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.