Carry Trade and Exchange Rate Regimes

Fabio Kanczuk and Laura Alfaro

No 2012_05, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: Carry trade activities and foreign participation in local currency bonds in emerging countries have increased dramatically during the last decade. In line with this observation, we revisit the question of optimal exchange rate regime when developing countries can borrow internationally with local currency denominated debt. We obtain that a “pseudo flexible regime”, in which the country accumulates reserves in conjunction with debt, is the best policy alternative under real external shocks.

Keywords: foreign reserves; contingent service; sovereign debt (search for similar items in EconPapers)
JEL-codes: F31 F34 (search for similar items in EconPapers)
Date: 2012-04-05
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