Commodity Trade and the Carry Trade: A Tale of Two Countries

Robert Ready, Nikolai Roussanov, Colin Ward

Research output: Contribution to journalArticle

19 Scopus citations

Abstract

Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies” offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity-producing countries from global productivity shocks, forcing final-good producers to absorb them. Commodity-currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.

Original languageEnglish (US)
Pages (from-to)2629-2684
Number of pages56
JournalJournal of Finance
Volume72
Issue number6
DOIs
StatePublished - Dec 2017

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