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A Note on the Algebra of Multiple Exchange Rates

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  • Sena Kimm Gnangnon

    (World Trade Organization (WTO))

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

  • Sena Kimm Gnangnon, 2020. "A Note on the Algebra of Multiple Exchange Rates," Economics Bulletin, AccessEcon, vol. 40(1), pages 316-337.
    • Handle: RePEc:ebl:ecbull:eb-19-00526
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    More about this item

    Keywords

    Development Aid; Aid for Trade; Non-Aid for Trade; Regulatory Policies; Developing Countries;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F3 - International Economics - - International Finance

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