Carry Trades and Monetary Policy

Take out a loan in a low interest rate currency. Invest this money in a high interest rate currency and enjoy the profit. This is called a currency carry trade – a very common trading strategy in the foreign exchange market. For the high interest rate currency, this practice entails high capital inflows and currency appreciation, at the same time exposing it to large reversals and exchange rate depreciation.
Kai Truempler decided to focus his PhD research on this practice’s interaction and impact on the monetary policies of countries subject to currency carry trades. Such policies have a crucial role to play in these speculative capital flows, by reducing risk for traders and reinforcing credit booms in the recipient country. Kai Truempler’s research could be of high interest for central bankers and financial stability experts.