Determinants of the Spread in a Two-Tier Foreign Exchange Market

12 Pages Posted: 15 Feb 2006

See all articles by Robert P. Flood

Robert P. Flood

International Monetary Fund (IMF) - Research Department; CENTRUM Business School; National Bureau of Economic Research (NBER)

Nancy Peregrim Marion

Dartmouth College - Department of Economics

Date Written: July 21, 1988

Abstract

The literature on two-tier foreign exchange markets has concentrated on relating various shocks to the spread between the exchange rates relevant to the two tiers of the exchange market. In some earlier work we found that none of the typical predictions of theory held up empirically as BLEU spread explanations. In particular we could not find any domestic policy variables that significantly explained the BLEU spread. Our finding led us to reformulate two-tier market theory. We find that if domestic agents are risk neutral then no domestic policy variables are predicted to influence the spread.

JEL Classification: 4314, 4320

Suggested Citation

Flood, Robert P. and Marion, Nancy P., Determinants of the Spread in a Two-Tier Foreign Exchange Market (July 21, 1988). IMF Working Paper No. 88/67, Available at SSRN: https://ssrn.com/abstract=884921

Robert P. Flood (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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CENTRUM Business School

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National Bureau of Economic Research (NBER)

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Nancy P. Marion

Dartmouth College - Department of Economics ( email )

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United States
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