Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes
NBER Working Paper No. 19098
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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