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Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa

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  • Emmanuel K. K. Lartey

Abstract

This paper investigates the question of whether capital inflows, particularly Foreign Direct Investment (FDI), cause the real exchange rate to appreciate. It also examines whether different forms of captial inflow have variable effects on the real exchange rate. The paper estimates an empirical real exchange rate model specifying a set of capital inflow variables using dynamic panel techniques. Based on data for a sample of sub-Saharan African countries for the period 1980�-�2000, the study reveals FDI as the category of private capital inflow that causes the real exchange rate to appreciate. The results also show that an increase in official aid causes a real appreciation, the magnitude being greater compared to that associated with FDI.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09638190701526667
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of International Trade & Economic Development.

Volume (Year): 16 (2007)
Issue (Month): 3 ()
Pages: 337-357

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Handle: RePEc:taf:jitecd:v:16:y:2007:i:3:p:337-357

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Related research

Keywords: Capital inflows; Real exchange rate; Dutch disease; Sub-Saharan Africa;

References

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  1. Linda S. Goldberg & Michael Klein, 1996. "Foreign direct investment, trade, and real exchange rate linkages in developing countries," Proceedings, Federal Reserve Bank of San Francisco, pages 73-100.
  2. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994. "The Capital Inflows Problem: Concepts And Issues," Contemporary Economic Policy, Western Economic Association International, vol. 12(3), pages 54-66, 07.
  3. Prema-Chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy, Wiley Blackwell, vol. 26(4), pages 613-637, 04.
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  5. White, Howard & Wignaraja, Ganeshan, 1992. "Exchange rates, trade liberalization and aid: The Sri Lankan experience," World Development, Elsevier, vol. 20(10), pages 1471-1480, October.
  6. Steve Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  7. Benjamin, Nancy C. & Devarajan, Shantayanan & Weiner, Robert J., 1989. "The Dutch disease in a developing country : Oil reserves in Cameroon," Journal of Development Economics, Elsevier, vol. 30(1), pages 71-92, January.
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  9. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
  10. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
  11. Sebastian Edwards, 2000. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 197-246 National Bureau of Economic Research, Inc.
  12. Harvey, Charles, 1992. "Botswana: Is the Economic Miracle Over?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 1(3), pages 335-68, November.
  13. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
  14. Deepak Lal, 1985. "The real exchange rate, capital inflows and inflation: Sri Lanka 1970–1982," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 121(4), pages 682-702, December.
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  16. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
  17. Collier, Paul & Gunning, Jan Willem, 1992. "Aid and Exchange Rate Adjustment in African Trade Liberalisations," Economic Journal, Royal Economic Society, vol. 102(413), pages 925-39, July.
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  19. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
  2. Combes, Jean-Louis & Kinda, Tidiane & Plane, Patrick, 2012. "Capital flows, exchange rate flexibility, and the real exchange rate," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1034-1043.
  3. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
  4. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
  5. Ben Naceur, Sami & Bakardzhieva, Damyana & Kamar, Bassem, 2012. "Disaggregated Capital Flows and Developing Countries’ Competitiveness," World Development, Elsevier, vol. 40(2), pages 223-237.
  6. Mouhamadou Sy & Hamidreza Tabarraei, 2010. "Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited," PSE Working Papers halshs-00574955, HAL.
  7. Christian Saborowski, 2009. "Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?," IMF Working Papers 09/20, International Monetary Fund.
  8. Emmanuel K. K. Lartey, 2011. "Financial Openness and the Dutch Disease," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 556-568, 08.
  9. Mouhamadou Sy & Hamidreza Tabarraei, 2010. "Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited," Working Papers halshs-00574955, HAL.
  10. Pedro M. G. Martins, 2010. "Do Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Working Paper Series 1110, Department of Economics, University of Sussex.
  11. Pedro M G Martins, . "Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Discussion Papers 10/07, University of Nottingham, CREDIT.

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