Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100124
Authors: 
Hernández, Juan R.
Year of Publication: 
2014
Series/Report no.: 
Working Papers, Banco de México 2014-09
Abstract: 
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 persistent, unless a closer measure to the true costs of funding for the agents is considered. (2) A stable long-run equilibrium relation emerges when I include the effects of funding liquidity shocks stemming from the U.S. and Europe. (3) The exchange rate forward premium adjusts towards a long-run equilibrium relation given by the CIP. (4) Surprisingly, the yield on 1-month Mexican CETEs has its own stochastic trend despite the strong relation between the U.S. and Mexico's economies. (5) Analysis confirms that both future and spot exchange rates are affected by shocks stemming from the U.S. Treasury Bills, the funding liquidity in the U.S. and Europe, and the Mexican CETEs.
Subjects: 
Covered Interest Parity
Forward and Spot Exchange Rates
Structural Vector Error Correction Model
JEL: 
C58
F31
G12
G13
G14
Document Type: 
Working Paper
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