Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/191653
Authors: 
Aregger, Nicole
Leutert, Jessica
Year of Publication: 
2017
Series/Report no.: 
Working Paper 17.03
Abstract: 
We build a two-country model with imperfect financial intermediation. Banks face limits to arbitrage which lead to positive excess returns in the investment markets and a risk premium in the international credit market. Gross capital flows affect the exchange rate since banks are balance sheet constrained and can only absorb additional flows on the international credit market if the exchange rate adjusts. Similarly, unconventional monetary policies such as foreign exchange interventions and credit easing influence asset prices in financial markets where banks are credit constrained. Within this framework, we study three external sources of appreciation pressure: Financial frictions in the foreign investment market, financial frictions in the international credit market and capital in flow shocks. In the two latter cases, foreign exchange interventions can reverse the resulting exchange rate movements and misallocations of capital. Furthermore, under certain conditions, foreign exchange interventions and credit easing are substitutes since asset purchases in one market reduce the excess returns in both.
Subjects: 
Exchange Rates
Interest Parity
Foreign Exchange Interventions
JEL: 
E44
E52
F31
F32
F41
G11
G15
G20
Document Type: 
Working Paper
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