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Destabilizing Carry Trades

Author

Listed:
  • Guillaume Plantin

    (Sciences Po Paris and CEPR (E-mail: guillaume. plantin@sciencespo.fr))

  • Hyun Song Shin

    (Bank for International Settlements)

Abstract

We offer a model of currency carry trades in which carry traders earn positive excess returns if they successfully coordinate on supplying excessive capital to a target economy. The interest-rate differential between their funding currency and the target currency is their coordination 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

  • Guillaume Plantin & Hyun Song Shin, 2014. "Destabilizing Carry Trades," IMES Discussion Paper Series 14-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:14-e-14
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    File URL: http://www.imes.boj.or.jp/research/papers/english/14-E-14.pdf
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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

    Keywords

    currency carry trades; inflation targeting; financial instability;
    All these keywords.

    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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