Covered Interest Parity Deviations: Macrofinancial Determinants

37 Pages Posted: 13 Feb 2019

See all articles by Eugenio Cerutti

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Haonan Zhou

Princeton University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 2019

Abstract

For about three 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 macro financial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, notonly regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).

Keywords: Interest parity, Foreign exchange markets, Interest rate differential, Monetary policy, Covered Interest Parity, Interest Rate Differentials, Forward FX M, Forward FX Market

JEL Classification: F31, G15

Suggested Citation

Cerutti, Eugenio and Obstfeld, Maurice and Zhou, Haonan, Covered Interest Parity Deviations: Macrofinancial Determinants (January 2019). IMF Working Paper No. 19/14. Available at SSRN: https://ssrn.com/abstract=3333738

Eugenio Cerutti (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Johns Hopkins University ( email )

Baltimore, MD 21218
United States

Maurice Obstfeld

University of California, Berkeley ( email )

530 Evans Hall #3880
Berkeley, CA 94720
United States

HOME PAGE: http://www.mauriceobstfeld.com

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

London
United Kingdom

Haonan Zhou

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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