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An Over†The†Counter Approach To The Forex Market

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  • Athanasios Geromichalos
  • Kuk Mo Jung

Abstract

The foreign exchange (FOREX) market is an over†the†counter market characterized by intermediation and significant bid–ask spreads. However, most of the existing international macroeconomics literature models the FOREX as a standard Walrasian market. This article constructs a dynamic general equilibrium model of intermediation in the FOREX market. We use our framework to compute standard measures of FOREX liquidity, such as bid–ask spreads and trade volume, and study how they are affected by macroeconomic fundamentals and market microstructure. We also study how FOREX market microstructure affects the volume of international trade and, consequently, welfare. Our empirical exercise offers support to the models' main predictions.

Suggested Citation

  • Athanasios Geromichalos & Kuk Mo Jung, 2018. "An Over†The†Counter Approach To The Forex Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 859-905, May.
    • Handle: RePEc:wly:iecrev:v:59:y:2018:i:2:p:859-905
    DOI: 10.1111/iere.12290
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    Cited by:

    1. Moeeni , Shahram & Tayebi , Komeil, 2018. "Is It Necessary to Restrict Forex Financial Trading? A Modified Model," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(1), pages 63-80, January.
    2. Liu, Tao & Lu, Dong & Woo, Wing Thye, 2019. "Trade, finance and international currency," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 374-413.
    3. Tao Liu & Dong Lu & Liang Wang, 2023. "Hegemony or Harmony? A Unified Framework for the International Monetary System," Working Papers 202305, University of Hawaii at Manoa, Department of Economics.
    4. Wang, Chenxi, 2023. "A model of international currency with private information," Journal of International Money and Finance, Elsevier, vol. 131(C).
    5. Jung, JiYong & Jung, Kuk Mo, 2021. "Stock market uncertainty and uncovered equity parity deviation: Evidence from Asia," Journal of Asian Economics, Elsevier, vol. 73(C).
    6. Dominguez, Begona & Gomis-Porqueras, Pedro, 2023. "Accessing U.S. Dollar Swap Lines: Macroeconomic Implications for a Small Open Economy," MPRA Paper 118293, University Library of Munich, Germany.

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