Investor's wiki

Dual Exchange Rate

Dual Exchange Rate

What Is a Dual Exchange Rate?

A dual exchange rate is a setup made by a government where their currency has a fixed official exchange rate and a separate floating rate applied to determined goods, sectors, or trading conditions. The floating rate is many times market-determined in parallel to the official exchange rate. The different exchange rates are planned to be applied as a method for settling a currency during an essential devaluation.

Understanding Dual Exchange Rates

A dual or various foreign exchange rate system is typically planned to be a short-term solution for a country to deal with an economic crisis. Defenders of the policy accept that it helps the government by keeping up with optimal production and distribution of exports while keeping international investors from quickly cheapening the currency in a panic. Pundits of the policy accept that such an intervention by the government can add volatility to the market dynamics as it would increase the degree of variance in normal price discovery.

In a dual exchange rate system, currencies can be exchanged in the market at both fixed and floating exchange rates. A fixed rate would be saved for certain transactions like imports, exports, and current account transactions. Capital account transactions, then again, might be determined by a market-driven exchange rate.

A dual exchange system can be utilized to reduce pressure on foreign reserves during an economic shock that outcomes in capital flight by investors. The hope would be that such a system can likewise ease inflationary pressures and empower governments to control foreign currency transactions.

Illustration of Dual Exchange Rate System

Argentina adopted a dual exchange rate in 2001, following long stretches of catastrophic economic difficulties set apart by recession and taking off unemployment. Under the system, imports and exports were traded at an exchange rate roughly 7% below the balanced peg between the Argentine peso and the U.S. dollar that stayed in place until the end of the economy.

This move was planned to make Argentine exports more competitive and give a burst of much-required growth. All things considered, Argentina's currency stayed unstable, leading initially to a sharp devaluation and later the development of various exchange rates and a currency black market that have contributed to the country's long period of unsteadiness.

Limitations of Dual Exchange Rates

Dual exchange rate systems are vulnerable to manipulation by parties with the most to gain from currency differentials. These incorporate exporters and merchants who may not as expected account for every one of their transactions to boost currency gains. Such systems additionally can possibly trigger black markets as government-commanded limitations on currency purchases force individuals to pay a lot higher exchange rates for access to dollars or other foreign currencies.

In dual exchange systems, certain parts of an economy might appreciate benefits over others, leading to contortions on the supply side in view of currency conditions as opposed to demand or other economic fundamentals. Roused by profit, beneficiaries of such systems might push to keep them in place past their period of convenience.

Scholarly studies of dual exchange rate systems have additionally inferred that they don't completely safeguard domestic prices due to the shifting of additional transactions than commanded to the parallel exchange rate as well as the depreciation of the parallel rate compared to the official rate.

Features

  • The system permits certain goods to be traded at one rate while others at an alternate rate.
  • This sort of system is censured for generating black-market trading.
  • A dual exchange rate system is viewed as a middle ground between a fixed rate and a market-driven devaluation.