Working Paper: CEPR ID: DP17197
Authors: Matteo Maggiori
Abstract: A review of recent advances in open economy analysis under segmented international financial markets. A set of modeling tools that have been used to understand financial crises, the ensuing policy response (e.g., Quantitative Easing and FX intervention), deviations from arbitrage (CIP deviations), and more generally the impact of capital flows on exchange rates. This modeling approach has also shed a different light on classic topics such as the exchange rate disconnect, international risk sharing, UIP failures, and the carry trade.
Keywords: financial frictions; market segmentation; risk bearing capacity; global financial institutions; fx intervention; cip; exchange rate disconnect; international monetary system
JEL Codes: F31; F32; F33; F36; F38; F41; F42; F65; G11; G15; G20; H12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial frictions (G19) | deviations from uncovered interest parity (UIP) (F31) |
| financial frictions (G19) | deviations from covered interest parity (CIP) (F31) |
| deviations from uncovered interest parity (UIP) (F31) | disconnect between exchange rates and macroeconomic fundamentals (F31) |
| foreign exchange interventions (F31) | stabilize exchange rates (F31) |
| foreign exchange interventions (F31) | beneficial effects on the real economy (E44) |
| gross capital flows from developed to emerging markets (F21) | significant exchange rate movements (F31) |
| gross capital flows from developed to emerging markets (F21) | impacts on asset prices and economic conditions (E44) |