Macroeconomic Determinants of Carry Trade Activity

52 Pages Posted: 17 Nov 2011

See all articles by Alessio Anzuini

Alessio Anzuini

Bank of Italy

Fabio Fornari

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: September 23, 2011


From a financial standpoint, the mechanics of the carry trade has been recently examined in Brunnermeier et al. (2009). They showed that shocks to interest rate differentials lead to carry trade activity and to significant reactions in the bilateral exchange rates vis-a-vis the US dollar that they analyse. Starting from their paper, we take a more macroeconomic standpoint and aim to identify what kind of structural shock can generate the implications of their interest rate differential shock. To this aim we add two macroeconomic variables and two indicators of confidence to the 4-variable financial VAR of Brunnermeier et al. (2009) and use sign restrictions on the impulse responses of the resulting larger VAR to identify four macroeconomic shocks. We evidence that demand shocks and confidence shocks are associated with longer-term gains from carry trade activity, relative to supply and monetary policy shocks. This finding also supports the widely reported idea that sentiment boosts position taking.

Keywords: carry trade, speculative activity, sign restriction

JEL Classification: G12, G13, G14

Suggested Citation

Anzuini, Alessio and Fornari, Fabio, Macroeconomic Determinants of Carry Trade Activity (September 23, 2011). Bank of Italy Temi di Discussione (Working Paper) No. 817, Available at SSRN: or

Alessio Anzuini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Fabio Fornari

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics