Arbitraging Covered Interest rate Parity Deviations and Bank Lending
Year: 2024
Type: article
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. (JEL F31, G01, G13, G21, O16)
Source: American Economic Review
DOI: 10.1257/aer.20230425
Author: Lorena Keller
Institution: University of Pennsylvania
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4401996823