Destabilizing carry trades

Guillaume Plantin and Huyn Shin

No 14-512, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supply- ing excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coor- dination 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.

Date: 2014-06
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Working Paper: Destabilizing carry trades (2014)
Working Paper: Destabilizing Carry Trades (2014)
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