Destabilizing carry trades

Résumé

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

Référence

Guillaume Plantin et Huyn Shin, « Destabilizing carry trades », TSE Working Paper, n° 14-512, juin 2014.