DP13886 Covered Interest Parity deviations: Macrofinancial determinants

Author(s): Eugenio Cerutti, Maurice Obstfeld, Haonan Zhou
Publication Date: July 2019
Keyword(s): Covered Interest Parity, forward FX market, Interest Rate Differentials
JEL(s): F31, G15
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13886

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).