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Carlos Fernández-Herraiz
Instituto de Estudios Bursátiles
Antonio Javier Prado Domínguez
Universidade da Coruña
Carlos Pateiro-Rodriguez
Universidade da Coruña
Jesus M. Garcia-Iglesias
Universidad de Extremadura
Vol. 7 No. 2 (2018), Articles, pages 123-137
Submitted: Oct 4, 2018 Accepted: Oct 6, 2018 Published: Dec 17, 2018
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Exchange credibility is a valuable asset for currency policymakers. In this article we intend to analyse exchange credibility from the perspective of carry trade speculators. Global speculators' access to shadow banking financing allows them to build dynamic carry trade strategies that are a source of potential financial instability. Our view is that the existence of dynamic carry trade opportunities offers a tool for monitoring how market participants asses the credibility of exchange policies. We use the long term performance of different carry trade dynamic specifications to understand how different is the market view of exchange policy credibility in the case of two leading Latin America countries, Mexico and Brazil. Our empirical research covers data from May of 2000 to May 2018. In light of the evidence presented, we recognize that Mexican peso exchange policy is considered credible but Brazilian real exchange policy is not considered credible during the sample period.


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