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Dual Exchange Markets and Intervention

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  • Pertti J. Haaparanta

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.

Suggested Citation

  • Pertti J. Haaparanta, 1988. "Dual Exchange Markets and Intervention," Canadian Journal of Economics, Canadian Economics Association, vol. 21(4), pages 814-825, November.
    • Handle: RePEc:cje:issued:v:21:y:1988:i:4:p:814-25
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    Cited by:

    1. Wen-ya Chang & Ching-chong Lai, 1998. "The dynamic unsubstitutability of sterilization operations and neutral-intervention operations under dual exchange rates," Journal of Economics, Springer, vol. 68(3), pages 235-253, October.
    2. Pasula, Kit, 1997. "Monetary Non-Neutrality and the Intertemporal Approach to the Balance of Trade: The UK Trade Balance under Bretton Woods," Review of International Economics, Wiley Blackwell, vol. 5(3), pages 333-347, August.
    3. Ching-chong Lai, 1990. "Exchange Rate Determination under Flexible and Two-Tier Exchange Rate Regimes," Eastern Economic Journal, Eastern Economic Association, vol. 16(2), pages 115-123, Apr-Jun.

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