Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes
The purpose of this paper is to determine whether a two-tier exchange rate regime is more effective than a fixed rate regime in increasing acountry's ability to pursue an independent monetary policy in the short run.The analysis compares adjustment to a monetary policy and to a devaluation in the two exchange rate regimes in a portfolio model under imperfect asset substitutability. It is shown that the two policies have in the short run larger effects on interest rates under a two-tier regime. The duration of this effect, however, is longer under a fixed rate regime. The analysis is conducted for the case of static and rational expectations, demonstrating that the above results do not depend on the expectation mechanism.
Document Object Identifier (DOI): 10.3386/w1107
Published: Aizenman, Joshua. "Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes." Journal of Development Economics, Vol. 18, (1985), pp. 153-169.
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