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Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium

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  • Robert Flood
  • Nancy Marion

Abstract

Most of the literature on two-tier exchange markets is built around models in which domestic policy can exert a powerful influence on the spread between the current account exchange rate and the capital account exchange rate. We show that if optimizing agents are risk neutral, domestic policy has no significant influence on the spread. Our work with Belgian data suggests that a nsk neutral specification for Belgian residents acting in the two-tier market is hard to reject, and we also find evidence that domestic variables do not affect the Belgian spread.

Suggested Citation

  • Robert Flood & Nancy Marion, 1989. "Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium," NBER Working Papers 3015, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3015
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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
    3. Dornbusch, Rudiger, 1986. "Special Exchange Rates for Capital Account Transactions," World Bank Economic Review, World Bank Group, vol. 1(1), pages 3-33, September.
    4. Daniel Gros, 1988. "Dual Exchange Rates in the Presence of Incomplete Market Separation: Long-Run Effectiveness and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 35(3), pages 437-460, September.
    5. Bhandari, Jagdeep S. & Decaluwe, Bernard, 1987. "A stochastic model of incomplete separation between commercial and financial exchange markets," Journal of International Economics, Elsevier, vol. 22(1-2), pages 25-55, February.
    6. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
    7. Anthony Lanyi, 1975. "Separate Exchange Markets for Capital and Current Transactions (Marchés des changes distincts pour les opérations sur capital et les opérations courantes) (Mercados cambiarios separados para las tr," IMF Staff Papers, Palgrave Macmillan, vol. 22(3), pages 714-749, November.
    8. Phylaktis, Kate, 1988. "Capital controls: The case of Argentina," Journal of International Money and Finance, Elsevier, vol. 7(3), pages 303-320, September.
    9. Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 43-66.
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