Dual Exchange Markets and Intervention

Pertti J. Haaparanta

Canadian Journal of Economics, 1988, vol. 21, issue 4, 814-25

Abstract: This paper analyzes the dual exchange rate system with neutral intervention, emphasized by the classics in the field, whereby the central bank sells in the capital market the foreign exchange it acquires from the current transactions. In contrast to nonsterilized intervention analyzed earlier in the literature, it is shown, in a choice-theoretic framework, that neutral intervention insulates th e balance of payments from all disturbances and the domestic interest rate from foreign interest rate shocks. The welfare properties of bot h systems are similar. It is also shown that the dual exchange system can be made superior to a uniform fixed exchange rate system.

Date: 1988
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