DP13182 An Intermediation-Based Model of Exchange Rates

Author(s):	Semyon Malamud, Andreas Schrimpf
Publication Date:	September 2018
Keyword(s):	covered interest parity deviations, Exchange Rates, Financial Intermediation, safe haven
JEL(s):	E44, E52, F31, F33, G13, G15, G23
Programme Areas:	Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13182

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.