Covered Interest Parity Deviations: Macrofinancial Determinants

51 Pages Posted: 7 Aug 2019 Last revised: 2 Jul 2021

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: August 2019


This paper studies how several macrofinancial factors are associated over time with the evolution of covered interest parity (CIP) deviations in the decade after the Global Financial Crisis. Changes in a number of risk- and policy-related factors have a significant association with the evolution of CIP deviations. Key measures of FX market liquidity and intermediaries’ risk-taking capacity are strongly correlated with the cross-currency basis (the deviation from CIP), and the close relationship between broad U.S. dollar strength and the basis is driven mainly by a common factor depending on other safe-haven currencies’ comovements. Postcrisis monetary policies also play a role, as demonstrated by the relationship between CIP deviations, central bank balance sheets, and term premia. Risk-related factors have more explanatory power than monetary policy-related factors over the entire 2010-2018 period, but they are approximately equally influential over the period’s second half. Further highlighting the role of bank regulation, we offer evidence that the year-end dynamics of the three- month dollar basis depend on financial regulations targeting global systemically important financial institutions.

Suggested Citation

Cerutti, Eugenio and Obstfeld, Maurice and Zhou, Haonan, Covered Interest Parity Deviations: Macrofinancial Determinants (August 2019). NBER Working Paper No. w26129, Available at SSRN:

Eugenio Cerutti (Contact Author)

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
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Johns Hopkins University ( email )

Baltimore, MD 21218
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Maurice Obstfeld

University of California, Berkeley ( email )

530 Evans Hall #3880
Berkeley, CA 94720
United States


Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
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National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Centre for Economic Policy Research ( email )

United Kingdom

Haonan Zhou

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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