Premium
AN OVER‐THE‐COUNTER APPROACH TO THE FOREX MARKET
Author(s) -
Geromichalos Athanasios,
Jung Kuk Mo
Publication year - 2018
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12290
Subject(s) - foreign exchange market , market microstructure , economics , intermediation , market liquidity , foreign exchange , financial market , monetary economics , financial economics , macroeconomics , finance , order (exchange)
The foreign exchange (FOREX) market is an over‐the‐counter market characterized by intermediation and significant bid–ask spreads. However, most of the existing international macroeconomics literature models the FOREX as a standard Walrasian market. This article constructs a dynamic general equilibrium model of intermediation in the FOREX market. We use our framework to compute standard measures of FOREX liquidity, such as bid–ask spreads and trade volume, and study how they are affected by macroeconomic fundamentals and market microstructure. We also study how FOREX market microstructure affects the volume of international trade and, consequently, welfare. Our empirical exercise offers support to the models' main predictions.