Deviations from covered interest rate parity and capital outflows: The case of Switzerland

May 28, 2020
Issue 2020-08


We investigate the relationship between deviations from the covered interest rate parity (CIP) and Swiss capital outflows since the great financial crisis. While the CIP held tightly before the crisis, it has been failing for most currencies vis-à-vis the US dollar ever since. We expect CIP deviations to adversely affect outflows, as they generally result in additional costs for Swiss investors. We find empirical support for our hypothesis. Our results show that with increasing CIP deviations, Swiss portfolio investment debt outflows decrease significantly. This decrease could have implications for the demand for domestic currency investments.

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JEL classification:
F31, F32, G11, G15
Covered interest rate parity, cross-currency basis, dollar funding, capital flows, portfolio investments

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