Covered Interest Parity Deviations: Macrofinancial Determinants
NBER Working Paper No. 26129
For several decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possibly temporary drivers (such as asynchronous monetary policy cycles).
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Document Object Identifier (DOI): 10.3386/w26129
Forthcoming: Covered Interest Parity Deviations: Macrofinancial Determinants, Eugenio M. Cerutti, Maurice Obstfeld, Haonan Zhou. in NBER International Seminar on Macroeconomics 2020, Frankel and Rey. 2020