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Capital Flows and their Impact on the Real Effective Exchange Rate

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  • Jean-Louis Combes

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Patrick Plane

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Tidiane Kinda

    (IMF - IMF - International Monetary Fund)

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.

Suggested Citation

  • Jean-Louis Combes & Patrick Plane & Tidiane Kinda, 2011. "Capital Flows and their Impact on the Real Effective Exchange Rate," Working Papers halshs-00552213, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00552213
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00552213
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    Cited by:

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    2. Okot, Anjelo & Kaltenbrunner, Annina & Perez Ruiz, Daniel, 2022. "Determinants of the exchange rate, its volatility and currency crash risk in Africa's low and lower middle-income countries," EIB Working Papers 2022/12, European Investment Bank (EIB).
    3. KAFANDO, Namalguebzanga, 2014. "L'industrialisation de l'Afrique: l'importance des facteurs structurels et du régime de change [The industrialization of Africa: the importance of structural factors and exchange rate regime]," MPRA Paper 68736, University Library of Munich, Germany.
    4. Grzegorz Tchorek & Michał Brzozowski & Paweł Śliwiński, 2017. "Determinants of capital flows to emerging and advanced economies between 1990 and 2011," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 16(1), pages 17-48, April.
    5. Hien, Nguyen Phuc & Hong Vinh, Cao Thi & Phuong Mai, Vu Thi & Kim Xuyen, Le Thi, 2020. "Remittances, real exchange rate and the Dutch disease in Asian developing countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 131-143.

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    More about this item

    Keywords

    pooled mean group estimator; Private capital flows; real effective exchange rate; exchange rate flexibility; emerging markets; low-income countries;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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