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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.

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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    Keywords

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    JEL classification:

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

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