Carry Trades Monetary Policy and Speculative Dynamics推荐.pdfVIP

Carry Trades, Monetary Policy and Speculative Dynamics∗ Guillaume Plantin Toulouse School of Economics and CEPR guillaume.plantin@tse-fr.eu Hyun Song Shin Princeton University hsshin@ This version, January 2011 Abstract We ask when currency carry trades are associated with destabilizing dynamics in the foreign exchange market, and investigate the role of monetary policy rules in setting off such dynamics. In a model where the exchange rate has a long-term fundamental anchor, we find that carry trades can be stabilizing or destabilizing at shorter horizons, depending on the propensity of capital inflows to overheat the recipient economy. In the destabilizing case, 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. JEL codes: F31, F41 Keywords: Currency crises, emerging market bubbles, speculation ∗This paper supersedes our earlier paper entitled “Carry Trades and Speculative Dy- namics”. We thank Patrick Bolton, Doug Diamond, Urban Jermann, Pete Kyle, Karen Lewis, Ady Pauzner, Lasse Pedersen, Richard Portes, Helene Rey, Tano Santos, Jeremy Stein, and Dimitri Vayanos for their comments on earlier drafts. 1 1 Introduction Low interest rates maintained by advanced economy central banks in the aftermath of the 2008 financial crisis have ignited a fierce debate about capital flows to emerging economies. The accusation is that such capi