The dynamic unsubstitutability of sterilization operations and neutral-intervention operations under dual exchange rates

The purpose of this paper is to examine whether neutral-intervention operations are a substitute for sterilization operations under the dual-exchange regime from the viewpoint of dynamic adjustment. It is found that both operations will generate quite different behavior throughout the adjustment process, although they are substitutable from the viewpoint of insulating money supply from the status of the current account. In addition, we also found that if the monetary authorities either intervene in the financial foreign exchange market or undertake sterilization operations in the open market, the dual-exchange regime will lose its insulation function to external financial disturbances.