Commodity Trade and the Carry Trade: a Tale of Two Countries

Nikolai Roussanov and Robert Ready
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Robert Ready: University of Rochester

No 817, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. We relate these differences to the differences of economic fundamentals across countries. We show that countries that primarily export basic commodities exhibit systematically high (real) interest rates while countries that specialize in exporting finished consumption goods typically have lower rates. The resulting interest rate differentials do not fully translate into the depreciation of the commodity currencies, on average. Instead, they translate into expected returns that capture the bulk of the unconditional risk premia that can be obtained in the currency markets. We provide a general equilibrium model of commodity trade and currency pricing that can rationalize these facts by relying on adjustment costs in the shipping sector.

Date: 2012
New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Commodity Trade and the Carry Trade: A Tale of Two Countries (2017)
Working Paper: Commodity Trade and the Carry Trade: a Tale of Two Countries (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed012:817

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