International Macroeconomics With Imperfect Financial Markets

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 ?financialcrises, 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 sheds a different light onclassic topics such as the exchange rate disconnect, international risk sharing, UIPfailures, and the carry trade.

The Prudential Use of Capital Controls and Foreign Currency Reserves

“…The last ingredient, the upward sloping supply of funds, connects this chapter to the large and growing literature on frictions in international banking, spearheaded byGabaix and Maggiori (2015). That literature is covered in detail in another chapter of this handbook,Maggiori (2021).3 See, e.g.,Vegh, Morano, Friedheim, and Rojas (2017).4 Ilzetzki, Reinhart, and Rogoff (2019) present compelling arguments in favor of the second view.…”

“…These different modeling approaches may have different macro-finance implications, in particular regarding deviations from uncovered interest parity (UIP) or covered interest parity (CIP) (seeAmador, Bianchi, Bocola, and Perri, 2020;Maggiori, 2021;Du and Schreger, 2021;Kalemli-Özcan and Varela, 2021;Fanelli and Straub, 2021). The implications of these modelling choices in normative models has received relatively less attention.…”