Foreign exchange rationing through multiple exchange rates: El Salvador 1981-1986
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Abstract
This dissertation examines the impact of a policy of rationing foreign exchange through multiple exchange rates on the level of output, the external balance, the income distribution, and the price level of a small developing economy in order to inform the ongoing policy debate. A modified version of the Levy model (Levy (1985)) is used to study the case of rationing foreign exchange through multiple exchange rates. The type of rationing that is considered is one in which foreign exchange in allocated by a vector of foreign exchange prices (applicable exchange rates), each of which is a function of an endogenous free floating exchange rate that equilibrates the forces of supply and demand in a parallel market. The parallel market is distinct from the official market, which can be, and is likely to be in disequilibrium due to the Central Bank's preservation of a fixed exchange rate. The key policy instruments that the economic authority uses to manage the official market disequilibrium are the rationing operators. Such devices are defined as proportions that indicate the extent to which the cost of inputs can be settled at the official lower exchange rate, and the degree to which export proceeds can be sold at the parallel higher exchange rate. The extended model is used to investigate whether discordant rationing choices would produce dissonant economic outcomes. It was found that the application of a simple but comprehensive rationing rule that does not discriminate among imports and exports does not generate a significantly better result in terms of inflation, output growth, employment, and income distribution than a conventional devaluation. The prospects for the dual exchange rate system brightened noticeably when rationing policies that allowed for selective treatment of imports and exports, and importers and exporters were examined.
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Dissertation (Ph.D.)--Boston University
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