Destabilizing Carry Trades

We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination device. We solve for a unique equilibrium that exhibits the classic pattern of the carry-trade recipient currency appreciating for extended periods, punctuated by sharp falls.

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Year of publication:	2014-12
Authors:	Plantin, Guillaume ; Shin, Hyun Song
Institutions:	Institute for Monetary and Economic Studies, Bank of Japan
Subject:	currency carry trades \| inflation targeting \| financial instability

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Extent:	application/pdf
Series:	IMES Discussion Paper Series.
Type of publication:	Book / Working Paper
Notes:	Number 14-E-14
Classification:	E58 - Central Banks and Their Policies ; G15 - International Financial Markets
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10011103456