Currency carry trade and the cost of international reserves in Mexico

National strategies aimed at boosting economic growth following the global financial crisis have spawned monetary imbalances between industrial and emerging economies. By implementing ultra-expansionary monetary policies, the industrial economies drive down interest rates, while the emerging economies tighten their monetary policies by raising rates, thus generating a burgeoning foreign-currency carry trade. Vulnerability is caused by the sudden reversal of such capital flows or the high cost of insuring against this by accumulating reserves. This paper estimates that the cost of reserve accumulation between 2008 and 2014 averaged 1.83% of GDP, so the free capital mobility espoused by the Mexican authorities makes it very costly to play by the rules of financial globalization.