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Using a vector error correction model I test whether shocks in the funding liquidity conditions in the U.S. and Europe separately explain deviations from the covered interest parity (CIP) between the U.S. Dollar and the Mexican Peso. I find that: (1) Apparent deviations from the CIP seem to be...
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Federal Reserve to foreign central banks via reciprocal currency arrangements (swap lines) reduced CIP deviations. In … particular, the announcement on October 13, 2008, that the swap lines would become unlimited reduced CIP deviations substantially …. These results indicate a breakdown of arbitrage transactions in the international capital markets during the crisis that …
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