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This can cause an overall loss even though you are making money on the interest rate differential.
We remain convinced that the Treasury Department has ample authority to issue regulations ameliorating the harshness of the interest rate differential. Even if the Department itself disagrees, it owes it to the American people to comply with the deadline imposed by Congress and to file its interest netting report.
Finally, should the Treasury Department conclude that interest netting cannot be accomplished within the confines of the current tax system (for example, because of the shortcomings of the IRS's computer system), TEI recommends that the interest rate differential be eliminated from the Code as inimical to a fair tax system.
Despite the unambiguous instruction that the IRS "should have implemented...comprehensive netting procedures" within three years, no such procedures were developed by the agency.(3) As a result, when Congress increased the interest rate for large corporate underpayments by two percentage points (thereby increasing the aggregate interest rate differential between overpayments and underpayments to three percentage points) in the Omnibus Budget Reconciliation Act of 1990, it affirmed its prior directive saying that "the Secretary should implement the most comprehensive crediting procedures under section 6402 that are consistent with sound administrative practice."(4)
TEI believes the concept underlying the interest rate differential was seriously flawed when the provision was enacted and remains flawed today.
Rather than increasing the interest rate differential, the Subcommittee should eliminate it altogether.
The more responsive asset demands are to interest rate differentials, the greater will be the initial increase in the demand for domestic currency and the larger the consequent appreciation of domestic currency that is needed to equilibrate demand and supply of foreign exchange.
TEI believes the policy underlying the interest rate differential was flawed when the provision was enacted and remains flawed today.
'Policy rate adjustments will help neutralize the (US) Fed rate hike on the interest rate differential between onshore and offshore, thus slowing the pace of capital outflow-As China continues to face significant capital outflow, onshore credit conditions will tighten further and put pressure on onshore interest rates.
For the interest rate differential, I used the series constructed and described above, considering a year with 52 weeks (1) therefore, I have daily data on total returns, exchange rate returns, 25-delta 3-month risk reversals and 3-month interest rate differentials.
The uncovered interest parity (UIP) condition states that the interest rate differential between two currencies will be offset by an equal rate of depreciation of the higher-yielding currency against the lower-yielding currency.