Covered Interest Parity Deviations: Macrofinancial Determinants / Eugenio M. Cerutti, Maurice Obstfeld, Haonan Zhou.

Format:

Book

Author/Creator:

Cerutti, Eugenio M.

Contributor:

Obstfeld, Maurice.

Zhou, Haonan.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26129.

NBER working paper series no. w26129

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Covered Interest Parity Deviations

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

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.

Notes:

Print version record

August 2019.