Macroeconomic determinants of carry trade activity

Alessio Anzuini and Fabio Fornari ()

No 817, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: 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. (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Date: 2011-09
New Economics Papers: this item is included in nep-cba and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/temi-disc ... 0817/en_tema_817.pdf (application/pdf)

Related works:
Journal Article: Macroeconomic Determinants of Carry Trade Activity (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_817_11

Access Statistics for this paper

More papers in Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().