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Home | Events | Beyond Bilateral Flows: Indirect Connections and Exchange Rates
Seminar

Beyond Bilateral Flows: Indirect Connections and Exchange Rates

  • Location
    Erasmus University Rotterda, Campus Woudestein, ET-14
    Rotterdam
  • Date and time

    October 02, 2025
    12:00 - 13:00

Abstract
This paper studies how cross-border financial connections affect the response of exchange rates to trade shocks. Theoretically, we develop a multi-country model whereby a country’s exchange rate depends on the financiers’ ability to manage capital flows between a country and its counterparties (direct connection) and between its counterparties and their trading partners (indirect connection). Empirically, we quantify the network of financial connections using granular data on cross-border claims and liabilities of globally active banks. Consistent with our theoretical predictions, we find that indirect connection can either amplify or mitigate the impact of trade shocks on future exchange rate returns, depending on the shock’s origin and size, while direct connection always dampens these effects.