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

CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department

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Date Written: June 5, 2018


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 and Schrimpf, Andreas, An Intermediation-Based Model of Exchange Rates (June 5, 2018). Swiss Finance Institute Research Paper No. 18-14, Available at SSRN: or

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Swiss Finance Institute

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

Andreas Schrimpf

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

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

Centralbahnplatz 2
CH-4002 Basel

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