Abstract for: Modeling Cross-Border Payments and Foreign Exchange Dynamics – Correspondent Accounts Framework

A great portion of domestic payments are made by transfers of deposits, which are created through bank loans under the current debt money systems. Cross-border payments occur through the network of correspondent banks. Yet most existing models abstract such system structure. We introduce a generic framework to describe cross-border payments based on Accounting System Dynamics modeling. We then perform preliminary optimization against reference mode of USD/TRY nominal spot rate during 2002-2018. Simulation results, though exploratory in nature, positively directs its future application to case studies. The new framework can be incorporated as a module of a large-scale macroeconomic model with policy structure, non-linear feedbacks, and psychological variables. Its flexibility and inclusivity allows integration of flow of funds framework, balance of payments, and international investment position by considering financial flows such as FX-denominated loans, which are increasingly becoming one of key drivers of short-term volatility in developing markets after quantitative easing policy by major central banks.