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Carry Trade and Exchange Rate Regimes

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  • Fabio Kanczuk

    ()

  • Laura Alfaro

    ()

Abstract

Carry trade activities and foreign participation in local currency bonds in emerging countries have increased dramatically during the last decade. In line with this observation, we revisit the question of optimal exchange rate regime when developing countries can borrow internationally with local currency denominated debt. We obtain that a “pseudo flexible regime”, in which the country accumulates reserves in conjunction with debt, is the best policy alternative under real external shocks.

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File URL: http://www.fea.usp.br/feaecon/RePEc/documentos/Kanczuk05WP.pdf
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Bibliographic Info

Paper provided by University of São Paulo (FEA-USP) in its series Working Papers, Department of Economics with number 2012_05.

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Date of creation: 05 Apr 2012
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Handle: RePEc:spa:wpaper:2012wpecon05

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Keywords: foreign reserves; contingent service; sovereign debt;

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  1. Alfaro, Laura & Kanczuk, Fabio, 2010. "Nominal versus indexed debt: A quantitative horse race," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1706-1726, December.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "The Forgotten History of Domestic Debt," NBER Working Papers 13946, National Bureau of Economic Research, Inc.
  3. Singh, Rajesh & Lahiri, Amartya & Vegh, Carlos A, 2007. "Segmented Asset Markets and Optimal Exchange Rate Regimes," Staff General Research Papers 11446, Iowa State University, Department of Economics.
  4. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  5. Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.
  6. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  7. Fabio Kanczuk, 2004. "Real Interest Rates and Brazilian Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 436-455, April.
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