Carry Trade, Exchange Rates, and the Balance-of-Payments

Nelson Barbosa-Filho

Journal of Globalization and Development, 2021, vol. 12, issue 1, 103-116

Abstract: This paper presents a partial equilibrium model that integrates interest rate arbitrage with the balance-of-payments constraint to determine the real exchange rate. The sequential logic is the following: (i) carry-trade determines the term premium, with the spot rate showing greater volatility than the forward rate, (ii) uncovered interest rate parity determines the spot rate based on the real exchange rate consistent with a financial constraint, defined as a stable ratio of foreign reserves to foreign debt; and (iii) the trade balance consistent with the financial constraint determines the long-run real exchange rate for a given ratio of domestic to foreign income.

Keywords: carry-trade; exchange rate; balance-of-payments constraint (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:globdv:v:12:y:2021:i:1:p:103-116:n:2

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DOI: 10.1515/jgd-2021-0029

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