Dual Exchange Markets versus Exclusive Forward Exchange Rate Support (Double marché des changes ou soutien exclusif des taux de change à terme) (Los mercados cambiarios dobles y el apoyo exclusivo al tipo de cambio a plazo)

This paper compares two mechanisms of official intervention in the foreign exchange market that provide a stable exchange market accessible to traders while insulating the money supply and reserves by the inducement of capital inflows (outflows) equal to the trade deficit (surplus). The first policy involves the establishment of a dual exchange market, giving official support exclusively to the commercial market, and official sales (purchases) of domestic currency resulting from support operations in the commercial market offset by official purchases (sales) of domestic currency in the free financial market. The second policy entails exclusive forward exchange rate support in a unitary market, a free spot exchange rate, and official forward sales (purchases) of domestic currency resulting from support operations in the forward market offset--on maturity--by official purchases (sales) of domestic currency in the free spot market. The main findings of the paper are as follows: (1) The capital flows that are induced are uncovered under the dual market system but covered under the unitary market system. (2) Larger changes in the spread between the free and supported exchange rates occur under the dual market system. (3) Under the dual market system, changes in the spread are likely to have a detrimental impact on both leads and lags, and evasion; under the unitary market system, those changes are likely to have a stabilizing impact on leads and lags, and are unlikely to encourage forward market speculation. (4) To deter forward market speculation under the unitary market system would require administrative controls to monitor only forward contracts; deterring evasion under the dual market system requires more extensive administrative controls that monitor both spot and forward contracts. The dual market system relies on the inducement of speculative (that is, uncovered) capital flows but is threatened by illegal arbitrage between the supported and free markets. In contrast, the unitary market system relies on the inducement of covered arbitrage capital flows but is threatened by speculation between the supported and free markets. Given that individuals are averse to risk, a system that relies on riskless operations but is threatened by risky operations will work more effectively than a system that relies on risky operations but is threatened by riskless operations. /// L'étude compare deux modes d'intervention des autorités monétaires sur le marché des changes