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The Monetary Ramifications of the Carry Regime
Carry Regimes
Carry trades produce superior returns when volatility of the relevant asset market prices remains low or falls lower. When this occurs for an extended period, capital is attracted into carry trades on the expectation that they will continue to produce superior results. Over time capital employed in carry trades increases and eventually can become large enough that market behavior itself becomes dominated by carry trades. This is what we call a “carry regime.”
We have introduced the question of whether carry regimes are a natural outcome of a free market economic system or whether they are a function of policies implemented by central banks and other government institutions. Our answer ...
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