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An Intermediation-Based Model of Exchange Rates

Author

Listed:
  • Semyon Malamud
  • Andreas Schrimpf
  • Yuan Zhang

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 risk-sharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices, affecting 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.

Suggested Citation

  • Semyon Malamud & Andreas Schrimpf & Yuan Zhang, 2025. "An Intermediation-Based Model of Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 38(8), pages 2386-2433.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:8:p:2386-2433.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf037
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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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