Time Consistency of Monetary Policy in Separating Exchange Markets

Fuhmei Wang ()
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Fuhmei Wang: Department of International Business Studies, National Chi-nan University

Journal of Economic Development, 2001, vol. 26, issue 2, 17-32

Abstract: Though a dual exchange rate system might be a preferable intermediate step from a fixed to a flexible rate, the efficiency of such a regime depends on the complete separation between two markets. When government reneges on its announcement and changes the commercial rate, the time inconsistency of monetary policy arises. This event might result in incomplete separation, the instability of spread and hence the erosion of this management. This paper attempts to investigate the role of credibility in such a regime. It concludes that, for successfully separating exchange markets, government should fix the commercial exchange rate rather than change it.

Date: 2001
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