Arbitraging covered interest rate parity deviations and bank lending Lorena Keller
By: Keller, Lorena
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Material type: 
ArticleSubject(s): INTERESES BANCARIOS | PRESTAMOS | PAISES EN DESARROLLO | TIPO DE CAMBIO
In:
The American Economic Review v. 114, n. 9, September 2024, p. 2633-2667.Summary: 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.
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| OP 234/2024/8 The American Economic Review | OP 234/2024/8-1 Repeated trading | OP 234/2024/9 The American Economic Review | OP 234/2024/9-1 Arbitraging covered interest rate parity deviations and bank lending | OP 234/2024/9-2 Big loans to small businesses | OP 234/2024/9-3 Spending and job-finding impacts of expanded unemployment benefits | OP 235 Journal of Taxation of Investments |
Bibliografía.
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.
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