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Monetary Policies and Destabilizing Carry Trades under Adaptive Learning

Author

Listed:
  • Cyril Dell'Eva

    (University of Pretoria [South Africa])

  • Eric Girardin

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Patrick A. Pintus

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.

Suggested Citation

  • Cyril Dell'Eva & Eric Girardin & Patrick A. Pintus, 2020. "Monetary Policies and Destabilizing Carry Trades under Adaptive Learning," Working Papers halshs-02872378, HAL.
    • Handle: RePEc:hal:wpaper:halshs-02872378
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02872378
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Index terms-Capital inflows; Carry trades; interest rate differential; Vicious circle; Inflation targeting JEL classification: E44; E52; E58; F31; G15;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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