A Note on Dual/Multiple Exchange Rates

Date: May 2004
Type: Papers and Briefs
Subject:
Series: ERD Policy Briefs
ISSN: 1655-5260 (print)

Description

Exchange rates measure the relative prices of different currencies. Usually each country has one official exchange rate regime. Occasionally, however, countries implement dual or multiple exchange rate regimes (DMERs). Currently, five of the Asian Development Bank's (ADB) developing member countries (DMC) have DMERs in place. DMERs have significant economic implications. In particular, DMERs have largely failed to deliver the beneficial outcomes intended by policymakers and caused various detrimental effects in developing countries.

Past experience demonstrates that DMERs are not a quick solution to underlying balance of payments and other economic problems. As such, a dual exchange rate system needs to be transitional in nature. However, too often they are put in place for too long, causing substantial economic damage. Thus, extreme caution must be exercised when considering introducing DMERs. Once in place, steps must be taken to unify the exchange rates as soon as possible.

Contents

  • Introduction
  • What are the Dual and Multiple Exchange Rates?
  • Why Dual Exchange Rates?
  • The Difficulties of Implementing Dual Exchange Rates
  • Experience of Implementing DMERs and the Spread
  • Unifying Dual Exchange Rates
  • Lessons Learned
  • References