An Intermediation-Based Model of Exchange Rates

Semyon Malamud, Andreas Schrimpf and Yuan Zhang
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Semyon Malamud: Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute
Yuan Zhang: Shanghai University of Finance and Economics

No 24-01, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a continuous time general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents from providing access to foreign claims. By tilting state prices, intermediaries’ market power breaks monetary neutrality and makes international risksharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices and exchange rate dynamics and their response to shocks. Our model can reproduce patterns consistent with several well-known exchange rate puzzles, such as deviations from Uncovered and Covered Interest Parity. All equilibrium quantities are derived in closed form, allowing us to pin down the underlying economic mechanisms explicitly.

Keywords: Financial Intermediation; Exchange Rates; Uncovered Interest Parity; Covered Interest Parity Deviations (search for similar items in EconPapers)
JEL-codes: E44 E52 F31 F33 G13 G15 G23 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2024-01
New Economics Papers: this item is included in nep-ban, nep-dge, nep-fdg, nep-ifn, nep-mon and nep-opm
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Related works:
Working Paper: An intermediation-based model of exchange rates (2018)
Working Paper: An Intermediation-Based Model of Exchange Rates (2018)
Working Paper: An Intermediation-Based Model of Exchange Rates (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2401

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