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

Author

Listed:
  • 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.

Suggested Citation

  • Alain Durré & Philippe Ledent, 2012. "The Two-tier foreign exchange market and the conduct of monetary policy: The Belgian case during Bretton-Woods era," Working Papers 2012-ECO-10, IESEG School of Management.
    • Handle: RePEc:ies:wpaper:e201210
    as

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    References listed on IDEAS

    as
    1. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    2. Vanderhart, Peter G., 2000. "The Federal Reserve's Reaction Function under Greenspan: An Ordinal Probit Analysis," Journal of Macroeconomics, Elsevier, vol. 22(4), pages 631-644, October.
    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.
    4. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Two-tier market; Taylor rule; Bretton Woods; Markov switching model;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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