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Capital Flows and their Impact on the Real Effective Exchange Rate

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  • Jean-Louis COMBES

    ()
    (Centre d'Etudes et de Recherches sur le Développement International)

  • Patrick PLANE

    ()
    (Centre d'Etudes et de Recherches sur le Développement International)

  • Tidiane KINDA

    (Centre d'Etudes et de Recherches sur le Développement International)

Abstract

This paper analyzes the impact of capital inflows and the exchange rate regime on the real effective exchange rate. A wide range of developing countries (42 countries) is considered with estimation based on panel cointegration techniques. The results show that both public and private inflows cause the real effective exchange rate to appreciate. Among private inflows, portfolio investment has the biggest effect on appreciation, almost seven times that of foreign direct investment or bank loans, and private inflows have the smallest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real effective exchange rate caused by capital inflows.

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Bibliographic Info

Paper provided by CERDI in its series Working Papers with number 201032.

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Length: 38
Date of creation: 2010
Date of revision:
Handle: RePEc:cdi:wpaper:1216

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Keywords: Private capital flows; real effective exchange rate; exchange rate flexibility; emerging markets; low-income countries; pooled mean group estimator;

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  1. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
  2. 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.
  3. Martin Petri & Tahsin Saadi-Sedik, 2006. "To Smooth or Not to Smooth," IMF Working Papers 06/257, International Monetary Fund.
  4. Amuedo-Dorantes, Catalina & Pozo, Susan, 2004. "Workers' Remittances and the Real Exchange Rate: A Paradox of Gifts," World Development, Elsevier, vol. 32(8), pages 1407-1417, August.
  5. Thomas William Dorsey & Zuzana Brixiova & Sukhwinder Singh & Helaway Tadesse, 2008. "The Landscape of Capital Flows to Low-Income Countries," IMF Working Papers 08/51, International Monetary Fund.
  6. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  7. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2004. "Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective," Working Paper Series 0353, European Central Bank.
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