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Escaping the macroeconomic trilemma: the Belgian two-tier foreign exchange system under Bretton Woods

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  • Alain Durré
  • Philippe Ledent

Abstract

In introducing a two-tier foreign exchange market under the Bretton Woods system, the Belgian monetary authorities aimed to insulate the domestic currency from (speculative) capital flows. By thus escaping the macroeconomic trilemma, they should have been able in practice to avoid taking account of foreign exchange developments in the determination of the monetary policy interest rate. The goal of this paper is to test this assumption empirically. Using a Taylor-rule approach, the paper shows that towards the collapse of the Bretton Woods system the volatility of the spread between the two segments of the foreign exchange market played a growing role in the determination of the monetary policy interest rate.

Suggested Citation

  • Alain Durré & Philippe Ledent, 2014. "Escaping the macroeconomic trilemma: the Belgian two-tier foreign exchange system under Bretton Woods," European Review of Economic History, European Historical Economics Society, vol. 18(1), pages 39-56.
    • Handle: RePEc:oup:ereveh:v:18:y:2014:i:1:p:39-56.
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    File URL: http://hdl.handle.net/10.1093/ereh/het020
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    Cited by:

    1. Baffigi, Alberto & Bontempi, Maria Elena & Felice, Emanuele & Golinelli, Roberto, 2015. "The changing relationship between inflation and the economic cycle in Italy: 1861–2012," Explorations in Economic History, Elsevier, vol. 56(C), pages 53-70.

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