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Destabilizing carry trades

Author

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  • Plantin, Guillaume
  • Shin, Huyn

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.

Suggested Citation

  • Plantin, Guillaume & Shin, Huyn, 2014. "Destabilizing carry trades," TSE Working Papers 14-512, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:28367
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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

    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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