Multiple Exchange Rates and Foreign Exchange Rationing: theory and an Application to El Salvador

We discuss the use of multiple exchange rates to ration foreign exchange in developing countries, focusing on the case where there is an officially set exchange rate and a second parallel rate that is freely determined by the market. We assume the Central Bank determines the proportions of imports (exports) that can be purchased (must be sold) at the official rate, with the remainder being settled at the parallel rate. By changing these proportions to different sectors and/or commodities a multiple exchange rate system (MERS) emerges.<p> We study the properties of such MERS in the context of a computable general equilibrium model and evaluate how different methods of allocating proportions for sectors and commodities affect output, employment and the real wage. An empirical application of the model to the case of El Salvador shows that the choice of rationing methods to allocate foreign exchange is of central importance; the same balance of payments outcome can be associated with very different changes in the real wage, employment and GNP.