NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes

Laura Alfaro, Fabio Kanczuk

NBER Working Paper No. 19098
Issued in June 2013
NBER Program(s):   IFM

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 policy that most effectively stabilizes fluctuations under real external shocks for emerging nations.

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Document Object Identifier (DOI): 10.3386/w19098

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