Dual Exchange Rates in the Presence of Incomplete Market Separation
Author | : Daniel Gros |
Publisher | : |
Total Pages | : 27 |
Release | : 2006 |
ISBN-10 | : OCLC:1291212506 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Dual Exchange Rates in the Presence of Incomplete Market Separation written by Daniel Gros and published by . This book was released on 2006 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: The existing literature on dual exchange rate regimes assumes that the separation between the two foreign exchange markets is perfect. In this paper, by contrast, 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.