THE EQUIVALENCE OF TARIFFS-CUM-SUBSIDIES AND OFFICIAL EXCHANGE-RATE DEVALUATIONS UNDER DUAL EXCHANGE MARKETS

This paper demonstrates that, under dual exchange markets, explicit tariffs-cum-subsidies on merchandise transactions raise the spread between the parallel and official exchange rates and, thereby, create implicit tariffs-cum-subsidies on capital account transactions. This implies that merchandise tariffs-cum-subsidies assume more of the properties of official exchange rate devaluations under dual exchange markets than under unified exchange markets. The two policies are equivalent when there is a one-to-one correspondence between transactions that are subject to merchandise tariffs-cum-subsidies and transactions that are channeled by law into the official exchange market.