University of Chicago, Chicago, IL 60637, USA;National Bureau of Economic Research, Cambridge, MA 02138, USA;New York University, New York, NY 10012, USA;National Bureau of Economic Research, Cambridge, MA 02138, USA
Abstract:
This paper provides an empirical overview on covered interest arbitrage during the flexible exchange rate regime of the 1970's. It estimates the cost of transactions in foreign exchange and security markets and shows that these costs account for most of the deviations from parity.