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)

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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
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article

Arbitraging Covered Interest rate Parity Deviations and Bank Lending

Lorena Keller
17 citations
American Economic Review
Banking stability, regulation, efficiency
8.09
article

Arbitraging Covered Interest rate Parity Deviations and Bank Lending

Lorena Keller
article en
17 citations

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)

American Economic ReviewVol. 114(9)
University of Pennsylvania (US)
Decent work and economic growth
Openalex Percentile: Top 2%
Banking stability, regulation, efficiency
8.09
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