Discussion Paper Details

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Title: An Intermediation-Based Model of Exchange Rates

Author(s): Semyon Malamud and Andreas Schrimpf

Publication Date: September 2018

Keyword(s): covered interest parity deviations, Exchange Rates, Financial Intermediation and safe haven

Programme Area(s): Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Malamud, S and Schrimpf, A. 2018. 'An Intermediation-Based Model of Exchange Rates'. London, Centre for Economic Policy Research.