The Bank of Israel publishes the third and final article from the upcoming Selected Research and Policy Analysis Notes: “The lack of dollar financing in Israel and abroad—an examination of diversions from the CIP conditions”
Selected Research and Policy Analysis Notes contains three short articles, two of which have already been published in recent weeks:
1. Assessing Israeli industries’ exposure to changes in the exchange rate;
2. The effect of the introduction of the tax on single-use products on their prices—disposable cups as a test case.
The third article, written by Sapir Masband under guidance from Daniel Nathan—The Lack of Dollar Financing in Israel and Abroad: An Examination of Diversions from the CIP (Covered Interest Parity) Conditions—examines the developments of the lack of dollar financing using gaps between the dollar interest rate outside of the US (offshore dollar rate) and the rate inside the US (onshore dollar rate). The article uses methodology that is common in the literature, and finds that this gap widened since the Global Financial Crisis of 2008, and that the gap remained wide even in the past 6 years, a period that has not been examined in previous studies.
This study reviews the factors behind the gap, including more stringent regulation over banks since the 2008 crisis. For the first time, this study also examines the gap in Israel, and finds that such a gap—a lack of dollar financing—exists in Israel at volumes similar to those found in the G10 countries. The study also finds that the size of the diversions from the CIP path in Israel and abroad tends to increase around economic crises.Click to download as PDF Click to download as PDF