Monetary policy and covered interest parity in the post GFC period: Evidence from the Australian dollar and the NZ dollar

Shin-ichi Fukuda () and Mariko Tanaka

Journal of International Money and Finance, 2017, vol. 74, issue C, 301-317

Abstract: After the global financial crisis (GFC), most major currencies had higher interest rates than the US dollar on forward contract because of increased demand for the US dollar as international liquidity. However, unlike the other major currencies, the Australian dollar and the NZ dollar had lower interest rates 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.

Keywords: Covered interest parity; Monetary policy; The global financial crisis (search for similar items in EconPapers)
JEL-codes: F36 G12 G15 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Monetary Policy and Covered Interest Parity in the Post GFC Period: Evidence from Australian Dollar and the NZ Dollar (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:74:y:2017:i:c:p:301-317

DOI: 10.1016/j.jimonfin.2017.02.022

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