Covered Interest Parity Deviations: Macrofinancial Determinants

Eugenio Cerutti, Maurice Obstfeld and Haonan Zhou

No 26129, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies how several macrofinancial factors are associated over time with the evolution of covered interest parity (CIP) deviations in the decade after the Global Financial Crisis. Changes in a number of risk- and policy-related factors have a significant association with the evolution of CIP deviations. Key measures of FX market liquidity and intermediaries’ risk-taking capacity are strongly correlated with the cross-currency basis (the deviation from CIP), and the close relationship between broad U.S. dollar strength and the basis is driven mainly by a common factor depending on other safe-haven currencies’ comovements. Postcrisis monetary policies also play a role, as demonstrated by the relationship between CIP deviations, central bank balance sheets, and term premia. Risk-related factors have more explanatory power than monetary policy-related factors over the entire 2010-2018 period, but they are approximately equally influential over the period’s second half. Further highlighting the role of bank regulation, we offer evidence that the year-end dynamics of the three- month dollar basis depend on financial regulations targeting global systemically important financial institutions.

JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-mon and nep-opm
Note: IFM
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Citations: View citations in EconPapers (12)

Published as Covered Interest Parity Deviations: Macrofinancial Determinants , Eugenio M. Cerutti, Maurice Obstfeld, Haonan Zhou. in NBER International Seminar on Macroeconomics 2020 , Tesar. 2021
Published as Cerutti, Eugenio M. & Obstfeld, Maurice & Zhou, Haonan, 2021. "Covered interest parity deviations: Macrofinancial determinants," Journal of International Economics, Elsevier, vol. 130(C).

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Related works:
Journal Article: Covered interest parity deviations: Macrofinancial determinants (2021)
Chapter: Covered Interest Parity Deviations: Macrofinancial Determinants (2020)
Working Paper: Covered Interest Parity Deviations: Macrofinancial Determinants (2019)
Working Paper: Covered Interest Parity Deviations: Macrofinancial Determinants (2019)
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