Working Paper: CEPR ID: DP16124
Authors: Wenxin Du; Jesse Schreger
Abstract: The covered interest rate parity (CIP) condition is a fundamental arbitrage relationship in international finance. In this chapter, we review its breakdown during the Global Financial Crisis and its continued failure in the subsequent decade. We review how to measure CIP deviations, discuss the drivers of CIP deviations, and the implications of CIP deviations for global financial markets.
Keywords: CIP; deviations; dollar; frictions; international capital markets
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory changes (G18) | balance sheet costs (G32) |
| balance sheet costs (G32) | supply of dollar funding (F33) |
| supply of dollar funding (F33) | CIP deviations (L15) |
| regulatory changes (G18) | CIP deviations (L15) |
| leverage ratio requirement (G32) | banks' ability to engage in CIP arbitrage (G21) |
| CIP deviations (L15) | global risk factors (F65) |