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Carry trades, interest differentials, and international monetary reform

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  • McKinnon, Ronald

Abstract

The international dollar standard is malfunctioning. Near zero U.S. short-term interest rates launch massive hot money outflows by carry traders into emerging markets (EM) in Asia and Latin America. Each EM central bank buys dollars to prevent its currency from appreciating but loses monetary control. Despite EM currency appreciation, average inflation in EMs is now much higher than in the old industrial economies—and world commodity prices are bid up sharply. This inflation on the dollar's periphery only registers in the U.S. CPI with a long lag. But the more immediate effect of the Fed's zero interest rate is to upset the process of bank intermediation within the American economy. Bank credit continues to be weak while employment languishes.Addendum(as of April 18, 2012)

Suggested Citation

  • McKinnon, Ronald, 2012. "Carry trades, interest differentials, and international monetary reform," Journal of Policy Modeling, Elsevier, vol. 34(4), pages 549-567.
  • Handle: RePEc:eee:jpolmo:v:34:y:2012:i:4:p:549-567
    DOI: 10.1016/j.jpolmod.2012.05.010
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    References listed on IDEAS

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    1. McKinnon, Ronald I, 1982. "Currency Substitution and Instability in the World Dollar Standard," American Economic Review, American Economic Association, vol. 72(3), pages 320-333, June.
    2. Axel Löffler & Gunther Schnabl & Franziska Schobert, 2012. "Limits of Monetary Policy Autonomy by East Asian Debtor Central Banks," CESifo Working Paper Series 3742, CESifo Group Munich.
    3. Ronald McKinnon & Gunther Schnabl, 2009. "The Case for Stabilizing China's Exchange Rate: Setting the Stage for Fiscal Expansion," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 17(1), pages 1-32.
    4. John B. Taylor, 2009. "Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Books, Hoover Institution, Stanford University, number 3.
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    Cited by:

    1. repec:eee:reveco:v:49:y:2017:i:c:p:548-567 is not listed on IDEAS
    2. Kornkarun Cheewatrakoolpong & Somprawin Manprasert, 2015. "Trade Diversification and Crisis Transmission: A Case Study of Thailand," Asian Economic Journal, East Asian Economic Association, vol. 29(4), pages 385-408, December.
    3. Rakesh Mohan & Muneesh Kapur, 2014. "Monetary Policy Coordination and the Role of Central Banks," IMF Working Papers 14/70, International Monetary Fund.

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