Working Paper | HBS Working Paper Series | 2013

Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes

by Laura Alfaro and Fabio Kanczuk


Carry-trade activity and foreign participation in local-currency-bond markets in emerging countries have increased dramatically over the past decade. In light of these trends, we revisit the question of the optimal exchange-rate regime when developing countries can borrow internationally with local-currency-denominated debt. We find that, as local-currency-bond markets develop, a "pseudo-flexible regime," whereby a country accumulates reserves in conjunction with debt, to be the best policy alternative under real external shocks for emerging nations.

Keywords: carry trade; exchange rate; foreign reserves; local-currency bonds; International Finance; Currency Exchange Rate; Financial Markets; Developing Countries and Economies;


Alfaro, Laura, and Fabio Kanczuk. "Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes." Harvard Business School Working Paper, No. 13-074, February 2013. (Revised May 2013. NBER Working Paper Series, No. 19098, June 2013)