Covered Interest Parity Deviations: Macrofinancial Determinants
37 Pages Posted: 13 Feb 2019
Date Written: January 2019
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: Suggested Citation