Devaluation, Dual Exchange Markets and Existence of an Equilibrium in a Flexible-Rates Regime-A Theoretical Note

Devaluation, Dual Exchange Markets and Existence of an Equilibrium in a Flexible-Rates Regime A Theoretical Note Prabhat Patnaik This paper argues that a transition to an open economy flexible exchange rate regime may not be followed over time even by successful export-led growth. This point is being made by many; a possible theoretical under- pinning for it is provided here, namely, that allowing freedom to capital flows in third world conditions is likely to create a situation where more capital wishes to flow out of the country than wishes to flow in; and, under such conditions, reducing the level of activity in the country via a squeeze on real wages and investment caused by a depreciating exchange rate, as a means of stabilising the economy is both economically absurd as well as socially pernicious.