Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from Australian Dollar and the NZ Dollar

Shin-ichi Fukuda () and Mariko Tanaka
Additional contact information
Mariko Tanaka: Musashino University

No CARF-F-401, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: Unlike the other major currencies, the Australian Dollar and the NZ dollar had lower interest rate than the US dollar on forward contract in the post GFC period. The purpose of this paper is to explore why this happened through estimating the covered interest parity (CIP) condition. In the analysis, we focus on a unique feature of Australia and New Zealand where short-term interest rates remained significantly positive even after the GFC. The paper first constructs a theoretical model where increased liquidity risk causes deviations from the CIP condition. It then tests this theoretical implication by using daily data of six major currencies. We find that both money market risk measures and policy rates had significant effects on the CIP deviations. The result implies that unique monetary policy feature in Australia and New Zealand made deviations from the CIP condition distinct on the forward contract.

Pages: 40 pages
Date: 2016-11
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/F401.pdf (application/pdf)

Related works:
Journal Article: Monetary policy and covered interest parity in the post GFC period: Evidence from the Australian dollar and the NZ dollar (2017)
Working Paper: Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from the Australian Dollar and the NZ Dollar (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf401

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