Arbitraging Covered Interest rate Parity Deviations and Bank Lending
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)
Authors
- Lorena Keller
Institutions
- University of Pennsylvania (US)
Publication Details
- Journal
- American Economic Review
- Published
- 2024-08-29
- DOI
- https://doi.org/10.1257/aer.20230425
- Citations
- 17
- Primary Topic
- Banking stability, regulation, efficiency
- Type
- article
- Field-Weighted Citation Impact
- 8.09