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A Modern History of Exchange Rate Arrangements: Parallel Markets and Dual and Multiple Exchange Rates

Reinhart, Carmen (2002): A Modern History of Exchange Rate Arrangements: Parallel Markets and Dual and Multiple Exchange Rates.

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There are cases where the parallel (or secondary) exchange rate applies only to a few limited transactions. An example is the “switch pound” in the United Kingdom during September 1950 through April 1967. However, it is not unusual for dual or parallel markets (legal or otherwise) to account for the lion’s share of transactions with the official rate being little more than symbolic. The official rate typically diminishes in importance when the gap between the official and market-determined rate widens. To provide a sense of the comparative relevance of the dual or parallel market we proceed along two complimentary dimensions. First, we include a qualitative description in the country-specific chronologies of what transactions take place in the official market versus the secondary market. Second, we develop a quantitative measure of the potential size of the leakages into dual or parallel exchange markets. We classify episodes where there are dual/parallel markets into three tiers according to the level (in percent) of the parallel market premium: low (below 10 percent), moderate (10 percent or above but below 50), and high (50 percent and above). For the episodes of dual/parallel markets, we provide information about which category each episode falls in (by calculating the average premium for the duration of the episode). This is background material for "The Modern History of Exchange Rate Arrangements: A Reinterpretation"

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