A Note on Dual/Multiple Exchange Rates

Abstract

Exchange rates measure the relative prices of different currencies. Usually each country has one official exchange rate regime. Occasionally, however, countries implement dual or multiple exchange rate regimes (DMERs). Currently, five of the Asian Development Bank's (ADB) developing member countries (DMC) have DMERs in place. DMERs have significant economic implications. In particular, DMERs have largely failed to deliver the beneficial outcomes intended by policymakers and caused various detrimental effects in developing countries.

Past experience demonstrates that DMERs are not a quick solution to underlying balance of payments and other economic problems. As such, a dual exchange rate system needs to be transitional in nature. However, too often they are put in place for too long, causing substantial economic damage. Thus, extreme caution must be exercised when considering introducing DMERs. Once in place, steps must be taken to unify the exchange rates as soon as possible.