Adjustment to Monetary Policy and Devaluation Under Two-Tier and Fixed Exchange Rate Regimes

Joshua Aizenman

NBER Working Paper No. 1107 (Also Reprint No. r0652)
Issued in November 1985
NBER Program(s):   ITI   IFM

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.

(199 K)

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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