Monetary Policies and Destabilizing Carry Trades Under Adaptive Learning

38 Pages Posted: 17 Jun 2020

See all articles by Cyril Dell'Eva

Cyril Dell'Eva

University of Pretoria

Eric Girardin

Aix-Marseille University - Aix-Marseille School of Economics

Patrick Pintus

Aix-Marseille University and CNRS

Date Written: June 17, 2020

Abstract

This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.

Keywords: Capital Inflows, Carry Trades, Interest Rate Differential, Vicious Circle, Inflation Targeting

JEL Classification: E44, E52, E58, F31, G15

Suggested Citation

Dell'Eva, Cyril and Girardin, Eric and Pintus, Patrick, Monetary Policies and Destabilizing Carry Trades Under Adaptive Learning (June 17, 2020). Available at SSRN: https://ssrn.com/abstract=3629221 or http://dx.doi.org/10.2139/ssrn.3629221

Cyril Dell'Eva

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, Gauteng 0002
South Africa

Eric Girardin

Aix-Marseille University - Aix-Marseille School of Economics

2 rue de la Charité
Marseille, 13236
France

Patrick Pintus (Contact Author)

Aix-Marseille University and CNRS ( email )

Ilot Bernard Dubois
5-9 Boulevard Maurice Bourdet
Marseille, 13001
France
0609397281 (Phone)

HOME PAGE: http://https://sites.google.com/site/patrickpintus/

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

Paper statistics

Downloads
24
Abstract Views
371
PlumX Metrics