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Capital inflows: Macroeconomic implications and policy responses

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  • Cardarelli, Roberto
  • Elekdag, Selim
  • Kose, M. Ayhan

Abstract

This paper examines the macroeconomic implications of and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 34 (2010)
Issue (Month): 4 (December)
Pages: 333-356

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Handle: RePEc:eee:ecosys:v:34:y:2010:i:4:p:333-356

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Keywords: Capital inflows Sudden stops Crises Sterilization Capital controls;

References

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Citations

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Cited by:
  1. Fratzscher, Marcel, 2012. "Capital controls and foreign exchange policy," Working Paper Series 1415, European Central Bank.
  2. Peter Tillmann, 2012. "Capital Inflows and Asset Prices: Evidence from Emerging Asia," Working Papers 182012, Hong Kong Institute for Monetary Research.
  3. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2010. "The Global Financial Crisis:How Similar? How Different? How Costly?," Koç University-TUSIAD Economic Research Forum Working Papers 1011, Koc University-TUSIAD Economic Research Forum.
  4. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
  5. Ila Patnaik & Ajay Shah, 2012. "Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?," IMF Economic Review, Palgrave Macmillan, vol. 60(3), pages 439-464, September.
  6. Peter Montiel, 2013. "Capital Flows: Issues and Policies," Research Department Publications IDB-WP-411, Inter-American Development Bank, Research Department.
  7. Furceri, Davide & Guichard, Stéphanie & Rusticelli, Elena, 2012. "The effect of episodes of large capital inflows on domestic credit," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 325-344.
  8. José Eduardo Gómez-González & Luisa Silva & Sergio Restrepo & Mauricio Salazar, 2012. "Flujos de capital y fragilidad financiera en Colombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  9. Julián Caballero, 2012. "Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises?: Cross-Country Evidence on Bonanzas in Capital Inflows and Bonanza-Boom-Bust Cycles," IDB Publications 71178, Inter-American Development Bank.
  10. Pirovano, Mara, 2012. "Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states," Economic Systems, Elsevier, vol. 36(3), pages 372-390.
  11. Asaf Akat & Ege Yazgan, 2013. "Observations on Turkey’s Recent Economic Performance," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(1), pages 1-27, March.

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