Working Paper: NBER ID: w3015
Authors: 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.
Keywords: two-tier foreign exchange market; risk neutrality; Belgium
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic policy (H59) | Spread between current account and capital account exchange rates (F32) |
| Risk-neutral specification (D81) | Spread between current account and capital account exchange rates (F32) |
| Domestic variables (C29) | Spread in the Belgian spread (L66) |
| Risk-neutral specification (D81) | Adequacy of risk-neutral utility function (D11) |