Prague Economic Papers 2003, 12(3):249-264 | DOI: 10.18267/j.pep.217

Leakages in dual exchange markets

Fuhmei Wang
National Cheng Kung University, Tainan, Taiwan 701, R.O.C. (e-mail: fmwang@mail.ncku.edu.tw).

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

Keywords: dual exchange markets, leakages, reputation
JEL classification: F32, F33, F41

Published: January 1, 2003  Show citation

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Wang, F. (2003). Leakages in dual exchange markets. Prague Economic Papers, 12(3), 249-264. doi: 10.18267/j.pep.217
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