Covered Interest Rate Parity Deviations, COVID-19 Pandemic Infection Cases, and Vaccination

This study explores the impact of the COVID-19 pandemic on the deviations from the covered interest rate parity (CIP) for G10 currencies. We find that more COVID-19 infection cases or higher stringency index are associated with larger CIP deviations. However, this relation disappears after the availability of COVID-19 vaccines, indicating that vaccines not only battle against coronavirus but also help promote efficiency in the FX market. Furthermore, we find that the rise of U.S. dollar value during the COVID-19 pandemic contributes to the persistent deviation from the CIP