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Destabilizing carry trades

Author

Listed:
  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh])

  • Hyun Song Shin

    (Princeton University)

Abstract

We offer a model of currency carry trades in which carry traders generate self-sustained excess returns if they 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. Such self-fulfilling pro table currency trades arise when the central bank of the target economy ignores the impact of carry-trade in flows on domestic asset prices, and responds only to their effect on inflation. 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.

Suggested Citation

  • Guillaume Plantin & Hyun Song Shin, 2015. "Destabilizing carry trades," Working Papers hal-03459933, HAL.
    • Handle: RePEc:hal:wpaper:hal-03459933
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03459933
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    File URL: https://sciencespo.hal.science/hal-03459933/document
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    Cited by:

    1. Breedon, Francis & Pétursson, Thórarinn G. & Vitale, Paolo, 2023. "The currency that came in from the cold: Capital controls and the information content of order flow," Journal of International Money and Finance, Elsevier, vol. 138(C).

    More about this item

    Keywords

    Currency Carry Trades; Inflation Targeting; Financial Instability;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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