An Intermediation-Based Model of Exchange Rates

52 Pages Posted: 30 Oct 2018

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: September 13, 2018

Abstract

We develop a general equilibrium model with intermediaries at the heart of international financial markets. In our model, intermediaries bargain with their customers and extract rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates an explicit, non-linear risk structure in exchange rates. We show how this endogenous risk structure helps explain a number of anomalies in foreign exchange and international capital markets, including the safe haven properties of exchange rates and the breakdown of covered interest parity.

Keywords: financial intermediation, exchange rates, safe haven, covered interest

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

Suggested Citation

Malamud, Semyon and Schrimpf, Andreas, An Intermediation-Based Model of Exchange Rates (September 13, 2018). BIS Working Paper No. 743. Available at SSRN: https://ssrn.com/abstract=3275747

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

Register to save articles to
your library

Register

Paper statistics

Downloads
20
Abstract Views
157
PlumX Metrics