What is a double exchange rate?
Double exchange rates are government-created settings, with fixed official exchange rates for currencies and individual floating exchange rates for specific commodities, sectors, or trading terms. Floating exchange rates are often determined in the market in parallel with the official exchange rate. Different exchange rates are intended to be applied as a way to help stabilize the currency during the required devaluation.
- The dual exchange rate system is seen as the midpoint between fixed rates and market-led devaluations.
- This system allows you to trade certain commodities at one rate and another at another.
- This type of system has been criticized for creating black market transactions.
Understand double exchange rates
Dual or multiple exchange rate systems are usually aimed at providing a short-term solution for a country to deal with an economic crisis. Policy proponents believe that it will help the government by maintaining optimal production and distribution of exports while preventing international investors from panicking and devaluing the currency rapidly. Policy critics believe that such intervention by the government only adds volatility to market dynamics, as it increases the degree of fluctuations in normal price discovery.
The dual exchange rate system allows currencies to be exchanged in the market at both fixed and floating exchange rates. Fixed rates are reserved for certain transactions such as imports, exports and checking accounts. Capital account transactions, on the other hand, may be determined by market-driven exchange rates.
The double exchange system can be used to reduce the pressure on foreign exchange reserves during an economic shock that results in investor capital flight. It is also hoped that such a system will ease inflationary pressures and allow governments to control foreign currency transactions.
Example of dual exchange rate system
Argentina adopted a double exchange rate in 2001 following years of catastrophic economic problems characterized by a recession and a surge in unemployment. Under this system, imports and exports were traded at an exchange rate about 7% below the one-to-one peso between the Argentine peso and the US dollar.
The move was aimed at making Argentina’s exports more competitive and providing the coveted burst of growth. Instead, Argentina’s currency remained volatile, initially leading to a sharp devaluation, followed by the development of multiple exchange rates and currency black markets, contributing to Argentina’s long-term destabilization. ..
Double exchange rate limits
Double exchange rate systems are susceptible to manipulation by the parties that most benefit from currency differences. These include exporters and importers who may not be able to properly explain all transactions in order to maximize the profits of the currency. Such systems can also create a black market, as government-mandated restrictions on currency purchases force individuals to pay much higher exchange rates for access to the dollar and other foreign currencies. ..
In a double exchange system, certain parts of the economy have an advantage over others, which can distort the supply side based on currency conditions rather than demand or other economic fundamentals. Motivated by profits, beneficiaries of such systems may promote keeping them in place well beyond their usefulness period.
Academic research on the dual exchange rate system also provides complete protection for domestic prices, as more transactions have shifted than required for parallel exchange rates and parallel rates have fallen compared to official rates. I conclude that there is no.