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Carry trades and US monetary policy

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  • Andrea Falconio

Abstract

I document that Federal Reserve expansionary monetary policy has a positive impact on the excess returns arising from currency carry trades. I show that expansive monetary surprises are associated with an increase in future real interest differentials between high interest rate currencies and the US dollar, which leads to higher capital flows toward those currencies and an increase in their returns. Since this increase is not fully compensated by a decrease in the returns from the short position in low interest rate currencies, unexpected monetary expansions in the US result in higher carry trade returns.

Suggested Citation

  • Andrea Falconio, 2023. "Carry trades and US monetary policy," Review of International Economics, Wiley Blackwell, vol. 31(1), pages 237-248, February.
    • Handle: RePEc:bla:reviec:v:31:y:2023:i:1:p:237-248
    DOI: 10.1111/roie.12624
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    References listed on IDEAS

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