CIP deviations: The role of U.S. banks’ liquidity and regulations

Walter Bazán, Marco Ortiz, Marco Terrones and Diego Winkelried

MPRA Paper from University Library of Munich, Germany

Abstract: This paper inquires how private bank regulation and liquidity in the US are related to the deviations from the covered interest parity (CIP) condition. We find evidence that bank liquidity effects on CIP deviations partially offset those resulting from regulatory changes in a sample of 11 OECD countries over the 2001-2019 period. This finding supports an old conjecture that changes in private banks' liquidity and regulation could significantly affect the wedge between liquid US dollars and illiquid foreign exchange forward contracts in international financial markets. Interestingly, the effects of liquidity on CIP deviations become more important when the impact of bank regulation intensifies, reflecting the presence of interaction effects.

Keywords: Cross-currency bases; covered interest rate parity; bank regulation; liquidity (search for similar items in EconPapers)
JEL-codes: E44 F31 G14 G15 O24 (search for similar items in EconPapers)
Date: 2023-09-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:118600

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