CIP Deviations, the Dollar, and Frictions in International Capital Markets
The covered interest rate parity (CIP) condition is a fundamental arbitrage relationship in international finance. In this chapter, we review its breakdown during the Global Financial Crisis and its continued failure in the subsequent decade. We review how to measure CIP deviations, discuss the drivers of CIP deviations, and the implications of CIP deviations for global financial markets.
This paper has been prepared for the Handbook of International Economics, Volume V, edited by Gita Gopinath, Elhanan Helpman and Kenneth Rogoff. We thank Angus Lewis and Ritt Keerati for outstanding research assistance. We are grateful to Gita Gopinath, Arvind Krishnamurthy, Matteo Maggiori, Brent Neiman, Ken Rogoff, Adrien Verdelhan, and Pierre Yared for comments. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.