Neutral Intervention Operations, Non-Neutral Monetary Disturbances, and Exchange Rate Dynamics under Two-Tier Exchange Regime:a comparison between Alternative Expectations

Neutral Intervention Operations, Non-Neutral Monetary Disturbances, and Exchange Rate Dynamics under Two-Tier Exchange Regime:a comparison between Alternative Expectations

Based on the Frenkel and Rodriguez(1982) model, this paper utilizes the regressive and the intraequilibrium expectation structure respectively to discuss how the economy will respond in the presence of permanent monetary policy, and compares the difference of the dynamic process generated under different expectation formulations. It is shown that, as the public make an overestimation in future long-run financial exchange rate, two kinds of expectations can produce sharply different adjustment paths of the financial exchange rate if capital mobility is relatively immobile. However, both expectations will contribute the same adjustment behavior if capital mobility is highly mobile.