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    A Quantity-Driven Theory of Term Premia and Exchange Rates
    Working Paper Summaries

    A Quantity-Driven Theory of Term Premia and Exchange Rates

    by Robin Greenwood, Samuel G. Hanson, Jeremy C. Stein, and Adi Sunderam
    This paper provides a framework for understanding how the detailed structure of financial intermediation affects foreign exchange rates.
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    Author Abstract

    We develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and term premia, as well as the finding that central banks’ quantitative easing policies impact exchange rates. An extension of our model sheds light on the persistent deviations from covered interest rate parity that have emerged since 2008.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: July 2020
    • HBS Working Paper Number: NBER Working Paper Series, No. 27615
    • Faculty Unit(s): Finance
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    Robin Greenwood
    Robin Greenwood
    George Gund Professor of Finance and Banking
    Anne and James F. Rothenberg Faculty Fellow
    Senior Associate Dean for Faculty Development and Research
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    Samuel G. Hanson
    Samuel G. Hanson
    William L. White Professor of Business Administration
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