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An Intermediation-Based Model of Exchange Rates

Author

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  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne, Centre for Economic Policy Research (CEPR), and Swiss Finance Institute)

  • Andreas Schrimpf

    (Bank for International Settlements (BIS))

Abstract

We develop a general equilibrium model of decentralized international financial markets. In our model, financial intermediaries bargain with their customers and extract endogenous rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates a non-linear risk structure in exchange rates. We use this risk structure to explicitly derive (i) a link between monetary and stabilization policies and safe haven properties of exchange rates; (ii) the global monetary spillover matrix; and (iii) deviations from covered interest rate parity (CIP), and show how all these effects depend on expectations about future monetary and stabilization policies.

Suggested Citation

  • Semyon Malamud & Andreas Schrimpf, 2018. "An Intermediation-Based Model of Exchange Rates," Swiss Finance Institute Research Paper Series 18-14, Swiss Finance Institute, revised Jun 2018.
    • Handle: RePEc:chf:rpseri:rp1814
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    Cited by:

    1. Reitz, Stefan & Umlandt, Dennis, 2019. "Foreign exchange dealer asset pricing," Discussion Papers 39/2019, Deutsche Bundesbank.
    2. Aldasoro, Iñaki & Ehlers, Torsten & Eren, Egemen, 2022. "Global banks, dollar funding, and regulation," Journal of International Economics, Elsevier, vol. 137(C).
    3. Jonathan Kearns & Andreas Schrimpf & Dora Xia, 2018. "Explaining Monetary Spillovers: The Matrix Reloaded," BIS Working Papers 757, Bank for International Settlements.
    4. Jiang, Zhengyang, 2021. "US Fiscal cycle and the dollar," Journal of Monetary Economics, Elsevier, vol. 124(C), pages 91-106.
    5. Reitz, Stefan & Umlandt, Dennis, 2021. "Currency returns and FX dealer balance sheets," Journal of International Economics, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    exchange rates; dollar; covered interest parity deviations; currency skew; currency crashes;
    All these keywords.

    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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