Leakages in dual exchange markets

Abstract

The issue of determining inter-market foreign exchange flows under dual exchange markets has been hotly debated. Typically the literature has concentrated on the behavior of the financial premium, leaving aside equally important aspects such the reasons for and characteristics of incomplete separation. Our analytical results suggest that cross transactions arise as long as the government changes the commercial rate. Time inconsistency of policy brings opportunity for leakages between two markets. We also find that the more patient the government, the less likely the occurrence of commercial depreciation and leakages will be. Then reputation could be as a deterrent to leakages

Imperfect Competition with Separating Exchange Markets

“…Stabilisation policy via monetary means 5 See Wang (1996) for traditional analyses of two-tier exchange markets. becomes difficult and even impossible.…”