Dual Exchange Rate Regime Research Articles

South Africa’s Trade Performance under Alternative Exchange Rate Regimes

This study examined the effect exchange rates have on import and export volumes under alternative exchange rate policies adopted in South Africa over the period 1960 to 2017. Using quarterly time series data for the stated period, a log-linear error correction model is employed to estimate the country’s export and import elasticities, taking into account Gross Domestic Product (GDP), the real price of exports, the real price of imports and real exchange rates. Using the freely floating exchange rate regime as the base period, the study concluded that both export and import volumes are lower under a system of fixed exchange rates. Export and import volumes were also found to be lower under the dual exchange rate regime, relative to the freely floating exchange rate regime. In accordance with export-led growth strategies, exports were found to be higher and imports lower under a managed floating exchange rate regime. It is therefore recommended that South Africa revert to a more managed exchange rate regime, until the South African economy is developed to accommodate a freely floating exchange rate regime.

South Africa’s Trade Performance under Alternative Exchange Rate Regimes

This study examined the effect exchange rates have on import and export volumes under alternative exchange rate policies adopted in South Africa over the period 1960 to 2017. Using quarterly time series data for the stated period, a log-linear error correction model is employed to estimate the country’s export and import elasticities, taking into account Gross Domestic Product (GDP), the real price of exports, the real price of imports and real exchange rates. Using the freely floating exchange rate regime as the base period, the study concluded that both export and import volumes are lower under a system of fixed exchange rates. Export and import volumes were also found to be lower under the dual exchange rate regime, relative to the freely floating exchange rate regime. In accordance with export-led growth strategies, exports were found to be higher and imports lower under a managed floating exchange rate regime. It is therefore recommended that South Africa revert to a more managed exchange rate regime, until the South African economy is developed to accommodate a freely floating exchange rate regime.

EXCHANGE RATE REGIMES AND FISCAL DISCIPLINE: THE ROLE OF CAPITAL CONTROLS

How do exchange rate regimes influence fiscal discipline? This important question has typically been addressed exploiting the classic dichotomy of fixed versus flexible exchange rate regimes assuming perfect capital mobility. However, the role of capital controls cannot be neglected, particularly in developing countries. This paper analyzes the effects of capital controls on fiscal performance by focusing on dual exchange rate regimes. In a model in which the fiscal policy is endogenously determined by a nonbenevolent fiscal authority, dual regimes induce politicians to have higher fiscal deficits than under fixed and flexible regimes operating under perfect capital mobility. The model also shows this effect increases as fiscal authorities become more impatient. Dynamic panel regressions confirm that dual regimes lead to higher fiscal deficits than fixed and flexible regimes operating under unified rates. Using a dummy for pre‐electoral year as an indicator of fiscal authorities' shortsightedness, we also confirm that dual exchange rate has a more adverse effect on fiscal deficits as the authorities become more impatient. (JEL E50, E60, F31, F41)

The "Great Moderation" in a Dual Exchange Rate Regime

In the early nineties, the U.S. economy was emerging from a brief slump, monetary policy was easy, and economic activity recovered quickly during the decade, with GDP eventually reaching and then passing the consensus full employment level. Yet aggregate inflation remained surprisingly subdued. This moderation in prices at the aggregate level persuaded policy makers to allow the easy-money stance to continue in spite of the presence of inflation in non-tradables and in housing and construction in particular. This paper uses a flex-price, mixed-exchange rate model to examine some of the major contributing factors to economic developments in the two-decade period that ended in the financial meltdown and the great recession. It argues that Chinese exchange rate manipulation and China's preference for holding dollar reserves were important contributing factors. On the U.S. side, failure to understand the importance of differencial inflation patterns in tradables and non-tradables sectors, and especially failure to see inflation in housing and construction as goods rather than asset inflation, allowed monetary expansion to last much longer than it should have.

Trade, Exchange Rate, and Energy Pricing Reform in Iran: Potentially Large Efficiency Effects and Gains to the Poor

AbstractIran is committed to substantial trade and market reform in its Third Five Year Development Plan. It started, however, with nontariff barriers on all products, a dual exchange rate regime with the market rate more than four times the official rate, and domestic energy product subsidies of about 90%. The authors develop a multisector computable general‐equilibrium model with ten rural and ten urban households to analyze the various reforms, separately and together. Reflecting the large initial distortions, they find that the combined reforms could generate large welfare gains equal to about 50% of aggregate consumer income. Moreover, the results show that well‐intentioned policies of commodity subsidies for the poor can have perverse effects. Even nontargeted direct income payments to all households (not just the poor) would enormously and progressively increase the incomes of the poor compared to the status quo.

International Stock Market Interdependence: A South African Perspective

The time-varying interdependence between South Africa and both the UK and US is modeled using a latent variable approach. We find little interdependence prior to March 1995 when exchange controls and a dual exchange rate regime were in place. After the unification of the exchange rates and the removal of exchange controls on non-residents, the interdependence with the US increased considerably. Despite the fact that many large South African companies have their primary or secondary listing on the London Stock Exchange, there is little interdependence with the UK after March 1995. The increase in interdependence with the US is consistent with the increase in US purchases of South African equities after March 1995.

The black market premium and the rate of inflation in a dual exchange rate regime

The black market premium and the rate of inflation in a dual exchange rate regime

The black market premium and the rate of inflation in a dual exchange rate regime

This paper examines the relationship between the black market premium and the rate of inflation under a dual exchange rate regime consisting of an official market and a black market. By explicitly specifying the implicit export tax associated with the government budget constraint in a dynamic optimizing context, the paper demonstrates that (1) for any given long-run rate of inflation, there exist two steady-state equilibria corresponding to a high premium and a low premium, and that (2) an increase in the rate of crawl of the official exchange rate has two effects on the premium, namely, the financing effect and the portfolio effect. Therefore, the conventional view that a trade-off exists between the black market premium and the rate of inflation when the inflation elasticity of money demand is less than unity does not generally hold. It is also shown that, although the implicit export tax vanishes when the two exchange rates are unified, the inflation tax may not increase because the unification increases the explicit export tax. This result also differs from the conventional view. Copyright © 2000 John Wiley & Sons, Ltd.

The long-run behavior of exchange rates in Brazil, Chile and Argentina: A cointegration analysis

This paper develops a portfolio balance model to explain asset holdings in foreign exchange markets in three Latin-American economies (Chile, Argentina and Brazil) that experienced episodes of persistent high inflation in the period between 1949 and 1989. In dual exchange rate regimes, official real exchange rates determine the level of premia in parallel or underground foreign exchange markets, given imperfect substitutability between parallel foreign and domestic currencies in local residents' portfolios. A cointegration approach is used to analyze the long-run behavior of parallel market premia.

Policy Reforms, Currency Auctions, and Production Choices in Transition Economies

Standard policy instruments such as currency devaluations and price reforms can lead to unusual responses in economies with underdeveloped financial markets and flexible price currency markets. We trace the effects of important policy instruments used within a dual exchange-rate regime, emphasizing that these effects depend on both the market power of producers in domestic industries and the concentration of power within thin currency auctions or interbank markets. The results are especially relevant for the transition economies of the former Soviet Union and Eastern Europe, where auction and interbank currency markets are being established and where some enterprises may exhibit significant local market power.

Capital controls and international trade finance in a dual exchange rate regime: The Belgian experience post-mortem

Capital Controls and International Trade Finance in a Dual Exchange Rate Regime: The Belgian Experience Post-Mortem. — The purpose of the paper is to model “leads and lags” capital flows on the official segment of a dual exchange market and to examine the effects of various types of capital controls imposed by authorities on the official spot and forward exchange markets. The focus of the analysis is the degree of insulation provided by a “dual exchange market cum capital controls” in face of a speculative crisis. The crucial variables in this respect are the deviation from covered interest parity and the forward risk premium. Results of the theoretical model are confronted with empirical evidence over the 1975–85 period.

Dual Exchange Rates in Europe and Latin America

This article uncovers some important empirical regularities surrounding the operation of formal dual exchange rates in Europe and Latin America in the 1970s and 1980s. Although there are parallels between the European and Latin American experiences, there are also interesting differences in terms of the size and nature of the distortion created by two official exchange rates; the response of the distortion to foreign interest rates, real commercial exchange rates, and domestic budget deficits; and the motives for adopting this exchange rate regime. Empirical work on dual exchange rate regimes is made difficult by the transitory nature of these regimes and by frequent changes in institutional practices.

Testing Exports Underinvoicing Under a Dual Exchange Rate Regime: Evidence for Brazilian Exports

The paper uses an expected utility model to explain exports underinvoicing under a dual exchange rate regime. Econometric estimation is done using an Error Correction Model (ECM). The hypotheses of export price and quantity underinvoicing are tested and the model confirms the former but not the latter. Using the estimated ECM, consistent estimates of capital flight due to price underinvoicing are calculated. The sample lower bound of the hard currency loss due to the existence of a dual exchange rate regime is US$ 13.9 billion, sufficient to repurchase a large portion of the Brazilian external debt at today's market value.

Alternative Dual Exchange Market Regimes: Some Steady-State Comparisons

Two dual exchange rate regimes are compared. Under one, the official market clears through changes in international reserves. Under the other, the central bank implements a rationing scheme so as to keep international reserves constant. The paper discusses the effects on inflation, the balance of payments, the real exchange rate, and the spread between the free and the official exchange rate of various economic policies, including exchange rate policy, fiscal policy, and unification of the exchange markets. It concludes that the steady-state effects for most of those policies are qualitatively the same under both regimes.

Exchange-rate management viewed as tax policies

The paper develops an analytical framework which demonstrates that along the lines of the celebrated Lerner symmetry theorem, the various forms of exchange-rate management are equivalent to corresponding tax policies. To highlight the salient issues, we consider two specific categories of exchange-rate policies. The first is a dual exchange-rate regime, which separates exchange rates for commercial and for financial transactions, and the second is a unified exchange-rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions. We show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing, and unified pegged exchange-rate policies can be usefully cast as lump-sum tax cum subsidy policies. The equivalence between the various characteristics of exchange-rate management and tax management suggests that exchange-rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies. A two-country model of the world economy is used to demonstrate the international transmission mechanism of these policies.

Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries

This paper develops a dynamic model of real exchange rate (RER) behavior in developing countries. A three goods economy (exportables, importables and non-tradables) is considered. Residents of this country hold domestic and foreign assets, and there is a dual exchange rate regime. There is a government that consumes importables and non-tradables. A distinction is made between equilibrium and disequilibrium movements of the RER. The determinants of real exchange rate misalignment are studied with emphasis placed on the role of devaluations and balance of payments crises. The implications of the model are tested using data for 12 developing countries. The results obtained are generally favorable for the model. The issue of RER stationarity is also analyzed.

Insulation Properties under Dual Exchange Rates

This paper reviews the insulation properties of a dual exchange rate regime. It is shown that, in general, a dual regime is not successful in insulating the economy from monetary and real shocks, of domestic and foreign origin. The existence of incomplete segmentation of markets as well as the role played by real exchange rate changes as channels of transmission of disturbances to real equilibrium output are discussed.

Dual Exchange Rates in the Presence of Incomplete Market Separation: Long-Run Effectiveness and Policy Implications

The literature on dual exchange rate regimes assumes that the separation between the two foreign exchange markets is perfect. In this paper a divergence between the two exchange rates induces a flow of arbitrage activity, the magnitude of which depends on both the costs of evading exchange controls and the size of the exchange rate differential. These arbitrage flows lead to a gradual convergence of the two exchange rates. In the long run, therefore, a dual exchange rate regime with a fixed commercial rate imposes the same constraints as a fixed unified exchange rate.

Relative Stabilization under Flexible and Dual Exchange Rate Regimes with Rational Expectations

Based on a rational expectations model, this paper analyzes the relation between wage indexation and the relative performance of macroshocks under the flexible regime versus dual regime with neutral intervention policy. The emphasis is on how the degree and type of wage indexation and the distinction between temporary and permanent disturbances affect the relative output variation under alternative exchange rates.

Dual Exchange Rates in the Presence of Incomplete Market Separation: Long-Run Effectiveness and Implications for Monetary Policy

The existing literature on dual exchange rate regimes assumes that the separation between the two foreign exchange markets is perfect. In this paper, by contrast, a divergence between the two exchange rates induces a flow of arbitrage activity, the magnitude of which depends on both the costs of evading exchange controls and the size of the exchange rate differential. These arbitrage flows lead to a gradual convergence of the two exchange rates. In the long run, therefore, a dual exchange rate regime with a fixed commercial rate imposes the same constraints as a fixed unified exchange rate.