Real Exchange Rates In The Presence Of Incomplete Market Seperation

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.