Destabilizing carry trades

Guillaume Plantin () and Hyun Song Shin
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Guillaume Plantin: ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh]

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Abstract: We offer a model of currency carry trades in which carry traders generate self-sustained excess returns if they 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. Such self-fulfilling pro table currency trades arise when the central bank of the target economy ignores the impact of carry-trade in flows on domestic asset prices, and responds only to their effect on inflation. 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.

Keywords: Currency Carry Trades; Inflation Targeting; Financial Instability (search for similar items in EconPapers)
Date: 2015-04-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03459933
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Related works:
Working Paper: Destabilizing carry trades (2015)
Working Paper: Destabilizing carry trades (2014)
Working Paper: Destabilizing Carry Trades (2014)
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