Destabilizing Carry Trades

Guillaume Plantin and Hyun Song Shin

No 14-E-14, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: 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.

Keywords: currency carry trades; inflation targeting; financial instability (search for similar items in EconPapers)
JEL-codes: E58 G15 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-ifn and nep-mac
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Citations: View citations in EconPapers (1)

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http://www.imes.boj.or.jp/research/papers/english/14-E-14.pdf (application/pdf)

Related works:
Working Paper: Destabilizing carry trades (2015)
Working Paper: Destabilizing carry trades (2015)
Working Paper: Destabilizing carry trades (2014)
Working Paper: Destabilizing carry trades (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:14-e-14

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