Dollar Shortages, CIP Deviations, and the Safe Haven Role of the Dollar

Philippe Bacchetta, Jonathan Davis and Eric van Wincoop
Additional contact information
Eric van Wincoop: University of Virginia and NBER

No 23-117, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Since 2007, an increase in risk or risk aversion has resulted in a US dollar appreciation and greater deviations from covered interest parity (CIP). In contrast, prior to 2007, risk had no impact on the dollar, and CIP held. To explain these phenomena, we develop a two-country model featuring (i) market segmentation, (ii) limited CIP arbitrage (since 2007), (iii) global dollar dominance. During periods of heightened global financial stress, dollar shortages in the offshore market emerge, leading to increased CIP deviations and a dollar appreciation. The appreciation occurs even in the absence of global dollar demand shocks. Central bank swap lines mitigate these effects.

Pages: 58 pages
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-mon and nep-opm
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Dollar Shortages, CIP Deviations, and the Safe Haven Role of the Dollar (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp23117

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