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Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes

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  • Laura Alfaro
  • Fabio Kanczuk

Abstract

Carry-trade activity and foreign participation in local-currency-bond markets in emerging countries have increased dramatically over the past decade. In light of these trends, we revisit the question of the optimal exchange-rate regime when developing countries can borrow internationally with local-currency-denominated debt. We find that, as local-currency-bond markets develop, a “pseudo-flexible regime,” whereby a country accumulates reserves in conjunction with debt, to be the policy that most effectively stabilizes fluctuations under real external shocks for emerging nations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19098.

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Date of creation: Jun 2013
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Handle: RePEc:nbr:nberwo:19098

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