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

Philippe Bacchetta, Jonathan Davis and Eric van Wincoop

No 31937, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E44 F31 G15 (search for similar items in EconPapers)
Date: 2023-12
New Economics Papers: this item is included in nep-cba, nep-mon and nep-opm
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Working Paper: Dollar Shortages, CIP Deviations, and the Safe Haven Role of the Dollar (2023)
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