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The Two-tier foreign exchange market and the conduct of monetary policy: The Belgian case during Bretton-Woods era

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Author Info

  • Alain Durré

    ()
    (IESEG School of Management)

  • Philippe Ledent

    (Economics School of Louvain, Belgium)

Abstract

This paper attempts to better understand the monetary policy decisions under the Belgian two-tier foreign exchange market during the Bretton-Woods system. Whereas this type of market organisation aimed at insulating the domestic currency from (speculative) capital flows, it is questioned whether monetary authorities did (or not) really pay attention to the free market when setting the monetary policy interest rate in practice. Using a Taylor-rule type approach, it is shown that the volatility of the spread between the two segments of the foreign exchange market has played a growing role in the interest rate dynamics over time. Moreover, a Markov switching model applied to the data provides evidence of two separate periods towards the collapse of the Bretton-Woods System, during which the monetary policy concerns have gradually changed.

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Bibliographic Info

Paper provided by IESEG School of Management in its series Working Papers with number 2012-ECO-10.

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Length: 45 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:ies:wpaper:e201210

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Keywords: Two-tier market; Taylor rule; Bretton Woods; Markov switching model;

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  1. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  2. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  3. Shengzu Wang & Jagdish Handa, 2007. "Monetary policy rules under a fixed exchange rate regime: empirical evidence from China," Applied Financial Economics, Taylor & Francis Journals, vol. 17(12), pages 941-950.
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