Carry Trade in an Agent-Based SFC model: destabilizing effects and prudential policies

CATULLO, ERMANNO; BORTZ PABLO GABRIEL; CAVERZASI, EUGENIO

Workshop; 2023 International Workshop of the Post-Keynesian Economics Society (PKES); 2023

THE PAPER PRESENTS A STOCK-FLOW AGENT-BASED MODEL TO UNDERSTAND THE IMPACTS OF EXTERNAL INDEBTEDNESS OF FIRMS ON ECONOMIC VOLATILITY, EXCHANGE RATE VULNERABILITIES AND INVESTMENT. FIRMS BORROW ABROAD TO INVEST IN PRODUCTIVE OR IN FINANCIAL ASSETS, EXPLOITING OPPORTUNITIES FOR CARRY TRADE PROFITS. SIMULATION RESULTS SHOW THAT CARRY TRADE INVESTMENT INCREASES GDP VOLATILITY AND RECESSION PROBABILITIES, THROUGH ITS IMPACT ON FIRMS' BALANCE SHEET, REDUCING INVESTMENT. WE ALSO EXPLORE THE EFFECTS OF MACROPRUDENTIAL POLICIES THAT LIMIT CREDIT GROWTH AND EXTERNAL INDEBTEDNESS. THESE POLICIES ARE EFFECTIVE (WITHOUT ANY LOSS IN OUTPUT) IF THEY MANAGE TO DISTINGUISH LARGE (AND EXTERNALLY INDEBTED) FIRMS FROM SMALLER (AND NOT EXTERNALLY INDEBTED) FIRMS.