An Intermediation-Based Model of Exchange Rates

58 Pages Posted: 6 Mar 2018 Last revised: 1 Sep 2020

See all articles by Semyon Malamud

Semyon Malamud

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

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 3 versions of this paper

Date Written: June 5, 2018

Abstract

We develop a general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, breaks monetary neutrality and generates an explicit, non-linear risk structure in exchange rates. Despite having zero net positions, intermediaries significantly distort exchange rate dynamics, affecting both the magnitude and sign of the response of exchange rates to shocks. In particular, our model is able to produce patterns that are both qualitatively and quantitatively consistent with several well-known exchange rate puzzles.

Keywords: Financial Intermediation, Exchange Rates, Currency Crashes, Uncovered Interest Parity, Covered Interest Parity

JEL Classification: E44, E52, F31, F33, G13, G15, G23

Suggested Citation

Malamud, Semyon and Schrimpf, Andreas, An Intermediation-Based Model of Exchange Rates (June 5, 2018). Swiss Finance Institute Research Paper No. 18-14, Available at SSRN: https://ssrn.com/abstract=3134347 or http://dx.doi.org/10.2139/ssrn.3134347

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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