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Carry Trade and Exchange Rate Regimes

Author

Listed:
  • 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.

Suggested Citation

  • Fabio Kanczuk & Laura Alfaro, 2012. "Carry Trade and Exchange Rate Regimes," Working Papers, Department of Economics 2012_05, University of São Paulo (FEA-USP).
  • Handle: RePEc:spa:wpaper:2012wpecon05
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    File URL: http://www.repec.eae.fea.usp.br/documentos/Kanczuk05WP.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "The Forgotten History of Domestic Debt," Economic Journal, Royal Economic Society, vol. 121(552), pages 319-350, May.
    2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    3. Lahiri, Amartya & Singh, Rajesh & Vegh, Carlos, 2007. "Segmented asset markets and optimal exchange rate regimes," Journal of International Economics, Elsevier, vol. 72(1), pages 1-21, May.
    4. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    5. 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.
    6. Alfaro, Laura & Kanczuk, Fabio, 2009. "Optimal reserve management and sovereign debt," Journal of International Economics, Elsevier, vol. 77(1), pages 23-36, February.
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    foreign reserves; contingent service; sovereign debt;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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