• KDI Journal of Economic Policy
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• v.34 no.1
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• pp.29-52
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• 2012

During the global financial turmoil in 2007-2008, deviation from the covered interest parity (CIP) between the Korean won and US dollar through the foreign exchange swap has escalated in its magnitude beyond 1,000bp in November 2008, and it still persists around 100bp level. In this paper, we examine a newly developed margin based asset pricing model using Kalman filter approach and show that the escalation of the CIP deviation is found to be significantly related to the global dollar funding illiquidity and country-specific funding conditions. Furthermore, we find evidence that the poor funding conditions (or higher margins) are driven by the general money market illiquidity and may lead to higher funding illiquidity, which suggests the reinforcing effects of the liquidity spiral. We also show that the supply of dollar liquidity and improved funding conditions help alleviate the deviations from the parity, however the persistent anomaly is found to be related to the high level of volatility in the FX swap market.

• KDI Journal of Economic Policy
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• v.36 no.2
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• pp.103-136
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• 2014

The covered interest rate parity condition (CIRP) has been widely used in open macroeconomic analysis, risk management, exchange rate forecasts, and so forth. Due to the recent global financial crises, there have been remarkable changes in the financial markets of the emerging markets. These changes possibly influenced the dynamics of the covered interest rate parity condition. In this paper, we investigate whether the CIRP dynamics has changed, and what is the nature of the regime changes. To do this, we propose and estimate multiple-state Markov regime switching models using a Bayesian MCMC method. Our estimation results indicate that the default risk or the deviation from the CIRP has been decreased after the crisis. It seems to be associated with the more active interaction between the short-term bond market and the short-term foreign exchange market than before. The tightened relation of these two financial markets is caused by the arbitrage transaction of foreign investors.

• Economic Analysis
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• v.27 no.1
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• pp.1-36
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• 2021

Given the US dollar's status as a global safe haven, global factors, such as US monetary policy, may have considerable impacts on financial markets in other countries. Regarding such hypothesis, this paper looked at the impacts of US monetary policy on domestic bond and FX swap markets through an event study. According to our analysis, US monetary policy had significant positive impacts on domestic interest rates. In particular, it turned out to have bigger impacts on long-term products with high term premiums. By period, the correlation between US monetary policy and domestic interest rates was not significant before the financial crisis, but was clearly positive after the crisis. The US conventional monetary policy was seen to have big impacts on short-term and medium-term KTB yields, while its unconventional monetary policy had major impacts on long-term KTB yields. Moreover, FX swap rates reacted very sensitively to US monetary policy shocks before the financial crisis, while they did not show any significant reactions after the crisis. This suggests that, in line with the covered interest rate parity, the impact of US monetary policy shocks was transmitted to domestic financial markets mainly through swap rate adjustments before the global financial crisis, but through the changes in domestic interest rates during the post-crisis period.