Covered Interest Parity Deviations: Macrofinancial Determinants

34 Pages Posted: 2 Aug 2019

See all articles by Eugenio Cerutti

Eugenio Cerutti

International Monetary Fund (IMF); Johns Hopkins University

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Haonan Zhou

Princeton University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: July 2019

Abstract

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).

Keywords: Covered Interest Parity, forward FX market, Interest Rate Differentials

JEL Classification: F31, G15

Suggested Citation

Cerutti, Eugenio and Obstfeld, Maurice and Zhou, Haonan, Covered Interest Parity Deviations: Macrofinancial Determinants (July 2019). CEPR Discussion Paper No. DP13886. Available at SSRN: https://ssrn.com/abstract=3428410

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 - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Haonan Zhou

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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