1. Capital flows, the carry trade and 'sand in the wheels'
- Author:
- Stephen Grenville
- Publication Date:
- 02-2010
- Content Type:
- Policy Brief
- Institution:
- Lowy Institute for International Policy
- Abstract:
- The 'carry trade', in which capital shifts from countries with low interest rates to countries with significantly higher rates, has become an important element of international capital flows over the past decade. With low interest rates in the United States, Japan, the UK and much of the rest of Europe expected to persist for some time, these flows seem likely to become larger in the aftermath of the Global Financial Crisis. Particularly for the emerging countries with shallow financial markets, interest-sensitive inflows have the potential to be disruptive. Exchange rates will tend to be overvalued for sustained periods, punctuated by sharp depreciations. These distorted and varying price signals will be unhelpful for good policy-making and steady economic growth.
- Topic:
- Emerging Markets, Globalization, International Trade and Finance, Foreign Direct Investment, and Financial Crisis
- Political Geography:
- United States, Japan, United Kingdom, and Europe