In this seminar Arjuna Mohottala will provide an overview of his recent paper, ‘The Macroeconomic Effects of the Carry-Trade Collapse’. Over the past decade or so, one of the most popular investment and trading strategies in the currency market has been the so-called Yen-carry trade. Most of the currency literature investigates the risk and return characteristics of the currency carry trade. Many macroeconomic series are sampled quarterly, although potentially useful predictors of carry trade collapse are observed at a higher frequency. The author looks at whether a threshold vector autoregression (TVAR) approach can improve the analysis of macroeconomic effect of carry trade collapse by using the changes in the nominal exchange rate as the threshold variable to capture the asymmetric effects of interest rates and exchange rate volatilities implied by the literature. Empirical results found by Arjuna shed some light on the relationships between carry trade collapse and the Australian economy. The author finds a strong evidence of nonlinearity in the data, with a regime switch occurring if the volatility of the nominal exchange rate reaches the estimated threshold value. Further, the research finds significant impact of interest rate differential shocks on the probability of regime switch taking place between the low and high nominal exchange rate volatility regimes. The findings of this paper further suggest that exchange rate shocks play an important role in the Australian economy.

Arjuna Mohottala is reading towards a PhD in Economics at CAMA focusing on the economic impact of exchange rate shocks. His research covers broader areas such as the macroeconomy, commodity cycles, workers remittances and international trade. Prior to arriving at ANU, Arjuna has been working as a Senior Economist at the Central Bank of Sri Lanka. While in Sri Lanka, he has been actively involved in the Rotaract movement (the youth arm of Rotary International) and headed the movement in 2009/2010 immediately after the cessation of the hostilities within the country.

The CAMA Macroeconomics Brown Bag Seminars offer CAMA speakers, in particular PhD students, an opportunity to present their work in progress in front of their peers, and reputable visitors to showcase their work.