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| Gabriel Di Bella, Francesco Grigoli and Rafael Romeu |
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| ''A Note on the Algebra of Multiple Exchange Rates'' |
| ( 2020, Vol. 40 No.1 ) |
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| A system of multiple exchange rates features segmented markets. Segmentation is achieved by the Central Bank categorizing transactions between residents and non-residents according to the exchange rate at which they are liquidated; and, by impeding exchange rate arbitrage through administrative and other controls. Operationally, it requires economic agents to use different accounts for each exchange rate. This paper develops the algebra of multiple exchange rates valid for any country with a multiple exchange rate system. It then applies it to Cuba, showing how its system boils down algebraically to a simple monetary rule, in which the Central Bank picks (i) the parity between the two domestic legal currencies; and (ii) the parity between the convertible domestic currency and foreign currencies, to ensure that foreign exchange reserves are not depleted. |
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| Keywords: Multiple Currencies, Multiple Exchange Rates, Cuba. |
JEL: E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
P3 - Socialist Institutions and Their Transitions: General |
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| Manuscript Received : Mar 20 2019 | | Manuscript Accepted : Feb 05 2020 |
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