We build a two-country model with imperfect financial intermediation. Banks face limits to arbitrage which lead to positive excess returns in the investment markets and a risk premium in the international credit market. Gross capital flows affect the exchange rate since banks are balance sheet...

Motivated by the potential contribution of China's unilateral peg to asset price inflation in the US before the financial crisis of 2007-2009, this paper studies the effect of alternative exchange rate regimes (flexible versus fixed) on the response of asset prices to economic shocks. I use a...