Dual Exchange Rate

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Dual Exchange Rate

A situation in which a currency has two official exchange rates, one pegged to another currency and the other floating. Each is used for different things. The exchange rate for money used for sectors seen as essential, such as food, is fixed, while "non-essential" sectors are allowed to float. A dual exchange rate allows a country to devalue its currency to reflect market realities without the pain of high inflation that usually accompanies severe devaluation. Critics allege that a dual exchange rate is less efficient than a straightforward devaluation and acts as a tariff on industries the government sees as luxuries.
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The latter change creates excess demand for foreign bonds which, because of the presence of dual exchange rates, depreciates the financial exchange rate and reduces the current domestic real interest rate.
This occurs because dual exchange rates enable free-spending politicians to enjoy the same temporarily low inflation as fixed regimes, as well as a temporary consumption boom which is regarded as desirable by impatient politicians.
The latter assumption is also supported by empirical evidence that shows that dual exchange rates are eventually abandoned, not because they are no longer needed or desired, but because they are no longer useful in insulating reserves and maintaining low inflation because of the appearance of different "leakages" that reduce the effectiveness of this capital control (Fleming 1971; Bhagwati 1978; May 1985; Guidotti 1988; O'Connel 1991; Kamin 1993; Kiguel, Lizondo, and O'Connell 1997).
This section solves the Ramsey planner's problem under dual exchange rates.
Myanmar is one of only 17 countries that still have dual exchange rates and even the IMF has only three experts on how to unify them.
The plan for Myanmar's boldest economic reform yet was laid out by central bank deputy governor Maung Maung Win in documents seen by Reuters on Tuesday that said preparations to unify the dual exchange rate should be made by the end of this month.
It is difficult to see how Europe might adopt dual exchange rates, one for trade and another for capital movements, in a way that would not provide opportunities for financial arbitrage.
After unifying the dual exchange rates of the Chinese currency renminbi (RMB) and implementing a managed-float system on January 1, 1994, China formally committed itself to partial currency convertibility, that is, currency convertibility under the current account, in December 1996.
Although China has claimed unification of the RMB dual exchange rates and partial currency convertibility in recent years, the effects of these liberalization policies could be jeopardized by the continuation of heavily rooted broad administrative intervention and discretion under the managed-float system.
1994) give more details about the dual exchange rate system in China.
The new package of economic measures announced by the government recently to conserve the dwindling foreign exchange reserves, curb flight of capital, restore the credibility of economic management and addressing the effects of international economic sanctions imposed on Pakistan in the wake of the nuclear tests, ushers in dual exchange rates, is a virtual devaluation and an attempt to compress imports by making them costlier.
New concerns about the durability of the Smithsonian Agreement surfaced in early 1973, after the Swiss authorities permitted their currencies to float and Italian authorities adopted dual exchange rates.

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