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The Dollar, Bank Leverage, and Deviations from Covered Interest Parity

  • Stefan Avdjiev
  • Wenxin Du
  • Cathérine Koch
  • Hyun Song Shin
American Economic Review: Insights
vol. 1, no. 2, September 2019
(pp. 193-208)
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Abstract

We document a triangular relationship in that a stronger dollar goes hand in hand with larger deviations from covered interest parity (CIP) and contractions of cross-border bank lending in dollars. We argue that underpinning the triangle is the role of the dollar as a key barometer of risk-taking capacity in global capital markets.

Citation

Avdjiev, Stefan, Wenxin Du, Cathérine Koch, and Hyun Song Shin. 2019. "The Dollar, Bank Leverage, and Deviations from Covered Interest Parity." American Economic Review: Insights, 1 (2): 193-208. DOI: 10.1257/aeri.20180322

Additional Materials

JEL Classification

  • F23 Multinational Firms; International Business
  • F31 Foreign Exchange
  • G15 International Financial Markets
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages