Carry Trades in Asia and the Pacific: Evidence on Unconventional Monetary Policies of Advanced Economies | Asian Development Bank

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Carry Trades in Asia and the Pacific: Evidence on Unconventional Monetary Policies of Advanced Economies

Publication | December 2017
Carry Trades in Asia and the Pacific: Evidence on Unconventional Monetary Policies of Advanced Economies

Quantitative easing appears to have the desired effect that central banks hope for, but not negative interest rate policies.

Since the global financial crisis of 2008, the world economy has faced many challenges and changes, which led us to reassess the uncovered interest rate parity (UIP). We are particularly interested in whether and to what extent unconventional monetary policy (UMP) affects the UIP relationship for 11 currencies in Asia and the Pacific. When we run the Fama regression for the period of 2001 through 2016, we show that UIP does not hold, consistent with previous studies. We augment the original Fama regression with a set of variables that represent financial and macroeconomic conditions as well as UMPs. We find that the UMPs in advanced economies have a significant effect on the Fama beta. The quantitative easing in the US, and quantitative and qualitative easing in Japan cause the Fama beta to be more negative, implying carry trade activities and “search for yield” behaviour. On the other hand, the negative interest rate policy, especially in the Eurozone and Switzerland, seem to cause greater uncertainty and have a positive effect on the Fama beta.

WORKING PAPER NO: 795