American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Arbitraging Covered Interest Rate Parity Deviations and Bank Lending
American Economic Review
vol. 114,
no. 9, September 2024
(pp. 2633–67)
Abstract
I propose and test a new channel through which covered interest rate parity (CIP) deviations can affect bank lending in emerging economies. I argue that when CIP deviations exist, banks attempt to arbitrage them. To do so, banks must borrow in a particular currency. When this currency is scarce, bank lending in the currency required to arbitrage decreases, while they use this currency in their arbitrage activities. I test this channel by exploiting differences in the abilities of Peruvian banks to arbitrage CIP deviations. I find evidence that supports the proposed channel.Citation
Keller, Lorena. 2024. "Arbitraging Covered Interest Rate Parity Deviations and Bank Lending." American Economic Review, 114 (9): 2633–67. DOI: 10.1257/aer.20230425Additional Materials
JEL Classification
- F31 Foreign Exchange
- G01 Financial Crises
- G13 Contingent Pricing; Futures Pricing; option pricing
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance