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Carry Trade, Exchange Rates, and the Balance-of-Payments

Author

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  • Barbosa-Filho Nelson H.

    (FGV EPPG, FGV, Brasília, Brazil)

Abstract

This paper presents a partial equilibrium model that integrates interest rate arbitrage with the balance-of-payments constraint to determine the real exchange rate. The sequential logic is the following: (i) carry-trade determines the term premium, with the spot rate showing greater volatility than the forward rate, (ii) uncovered interest rate parity determines the spot rate based on the real exchange rate consistent with a financial constraint, defined as a stable ratio of foreign reserves to foreign debt; and (iii) the trade balance consistent with the financial constraint determines the long-run real exchange rate for a given ratio of domestic to foreign income.

Suggested Citation

  • Barbosa-Filho Nelson H., 2021. "Carry Trade, Exchange Rates, and the Balance-of-Payments," Journal of Globalization and Development, De Gruyter, vol. 12(1), pages 103-116, June.
    • Handle: RePEc:bpj:globdv:v:12:y:2021:i:1:p:103-116:n:2
    DOI: 10.1515/jgd-2021-0029
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    More about this item

    Keywords

    carry-trade; exchange rate; balance-of-payments constraint; F31; F41;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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