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A Note on the Algebra of Multiple Exchange Rates

Author

Listed:
  • Gabriel Di Bella

    (International Monetary Fund)

  • Francesco Grigoli

    (International Monetary Fund)

  • Rafael Romeu

    (DevTech Systems)

Abstract

A system of multiple exchange rates features segmented markets. Segmentation is achieved by the Central Bank categorizing transactions between residents and non-residents according to the exchange rate at which they are liquidated; and, by impeding exchange rate arbitrage through administrative and other controls. Operationally, it requires economic agents to use different accounts for each exchange rate. This paper develops the algebra of multiple exchange rates valid for any country with a multiple exchange rate system. It then applies it to Cuba, showing how its system boils down algebraically to a simple monetary rule, in which the Central Bank picks (i) the parity between the two domestic legal currencies; and (ii) the parity between the convertible domestic currency and foreign currencies, to ensure that foreign exchange reserves are not depleted.

Suggested Citation

  • Gabriel Di Bella & Francesco Grigoli & Rafael Romeu, 2020. "A Note on the Algebra of Multiple Exchange Rates," Economics Bulletin, AccessEcon, vol. 40(1), pages 382-387.
    • Handle: RePEc:ebl:ecbull:eb-19-00287
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I1-P33.pdf
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    References listed on IDEAS

    as
    1. Gabriel Di Bella & Rafael Romeu, 2017. "Operational Issues Of Currency Unification In Cuba: A Note," Annual Proceedings, The Association for the Study of the Cuban Economy, vol. 27.
    2. Gabriel Di Bella & Andy Wolfe, 2008. "A Primer on Currency Unification and Exchange Rate Policy in Cuba: Lessons from Exchange Rate Unification in Transition Economies," Annual Proceedings, The Association for the Study of the Cuban Economy, vol. 18.
    3. Silvia Dreher, 2009. "Monetary Policy in Cuba," Annual Proceedings, The Association for the Study of the Cuban Economy, vol. 19.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Multiple Currencies; Multiple Exchange Rates; Cuba.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions

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