Foreign Exchange Intervention with UIP and CIP Deviations
· restud.com
We examine the welfare-based opportunity cost of foreign exchange (FX) intervention when both CIP and UIP deviations are present. We consider a small open economy that receives international capital flows through constrained international financial intermediaries. Deviations from CIP come from limited arbitrage or through a convenience yield, while UIP deviations are also affected by global risk.
Philippe Bacchetta, University of Lausanne, Swiss Finance Institute, CEPR, Kenza Benhima, University of Lausanne, CEPR, and Brendan Berthold, Zurich Insurance, ...