Advanced Search
MyIDEAS: Login to save this paper or follow this series

Capital Inflows and the Real Exchange Rate

Contents:

Author Info

  • Christian Saborowski

Abstract

This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=22639
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/20.

as in new window
Length: 42
Date of creation: 01 Jan 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/20

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Capital inflows; Real effective exchange rates; Emerging markets; Financial sector; Economic models; Statistical annexes; exchange rate; real exchange rate; stock market; capital markets; capital market; capital flows; exchange rate regime; exchange rate appreciation; exchange rates; real appreciation; capital market development; real effective exchange rate; composition of capital inflows; capital account liberalization; real exchange rates; stock market capitalization; real exchange rate movements; effective exchange rate; real exchange rate appreciation; capital controls; exchange rate movements; flexible exchange rate; fixed exchange rate; exchange restrictions; real exchange rate dynamic; foreign capital; exchange arrangements; capital account transactions; exchange rate dynamic; capitalization ratio; capital formation; rigid exchange rate regime; foreign exchange; global capital flows; international capital flows; management of capital inflows; domestic exchange rate; floating exchange rate; nominal exchange rate; international capital; exchange rate mechanism; exchange rate arrangement; flows of capital; domestic capital; capital control; effective exchange rates; stock exchanges; hedging; exchange rate changes; domestic capital formation; exchange rate regimes; flexible exchange rate regime; exchange rate regime classification; floating exchange rate regimes; fixed exchange rate regime; currency appreciation; foreign exchange market; speculative attacks;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  2. Sebastian Edwards, 1998. "Capital Flows, Real Exchange Rates, and Capital Controls: Some Latin American Experiences," NBER Working Papers 6800, National Bureau of Economic Research, Inc.
  3. Mody, Ashoka & Murshid, Antu Panini, 2005. "Growing up with capital flows," Journal of International Economics, Elsevier, Elsevier, vol. 65(1), pages 249-266, January.
  4. Stijn Claessens & Luc Laeven, 2005. "Financial Dependence, Banking Sector Competition, and Economic Growth," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(1), pages 179-207, 03.
  5. Ross Levine & Sara Zervos, . "Capital control liberalisation and stock market development," CERF Discussion Paper Series, Economics and Finance Section, School of Social Sciences, Brunel University 96-03, Economics and Finance Section, School of Social Sciences, Brunel University.
  6. Fisman, Raymond & Love, Inessa, 2004. "Financial development and growth in the short and long run," Policy Research Working Paper Series 3319, The World Bank.
  7. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
  8. Pierre-Olivier & Olivier Jeanne, 2009. "Capital Flows to Developing Countries: The Allocation Puzzle," Working Paper Series, Peterson Institute for International Economics WP09-12, Peterson Institute for International Economics.
  9. Peter L. Rousseau & Paul Wachtel, 1998. "Equity Markets and Growth: Cross-Country Evidence on Timing and Outcomes, 1980-1995," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 98-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Emmanuel K. K. Lartey, 2007. "Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa," The Journal of International Trade & Economic Development, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(3), pages 337-357.
  11. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2006. "Financial Globalization," IMF Working Papers 06/189, International Monetary Fund.
  12. repec:fth:wobaco:1083 is not listed on IDEAS
  13. Peter Blair Henry, 2006. "Capital account liberalization: theory, evidence, and speculation," Working Paper Series, Federal Reserve Bank of San Francisco 2007-32, Federal Reserve Bank of San Francisco.
  14. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, Elsevier, vol. 58(1-2), pages 261-300.
  15. Takatoshi Ito, 1999. "Capital Flows in Asia," Discussion Paper Series, Institute of Economic Research, Hitotsubashi University a371, Institute of Economic Research, Hitotsubashi University.
  16. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  17. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  18. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, Elsevier, vol. 75(1), pages 269-301, October.
  19. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(368), pages 825-48, December.
  20. 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, Wiley Blackwell, vol. 26(4), pages 613-637, 04.
  21. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 3-42, July.
  22. Antonio Ciccone & Elias Papaioannou, 2006. "Adjustment to target capital, finance and growth," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 982, Department of Economics and Business, Universitat Pompeu Fabra.
  23. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers, Institute for Fiscal Studies W95/17, Institute for Fiscal Studies.
  24. David Vávra & Inci Ötker & Barry Topf & Zbigniew Polanski, 2007. "Coping with Capital Inflows," IMF Working Papers 07/190, International Monetary Fund.
  25. Raymond Fisman & Inessa Love, 2004. "Financial Development and Intersectoral Allocation: A New Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 59(6), pages 2785-2807, December.
  26. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers, Stanford Institute for Economic Policy Research 07-004, Stanford Institute for Economic Policy Research.
  27. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198774099, October.
  28. Beck, Thorsten & Levine, Ross, 2004. "Stock markets, banks, and growth: Panel evidence," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(3), pages 423-442, March.
  29. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany.
  30. Mileva, Elitza, 2008. "The impact of capital flows on domestic investment in transition economies," Working Paper Series, European Central Bank 0871, European Central Bank.
  31. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  32. Agenor, Pierre-Richard, 1998. "Capital inflows, external shocks, and the real exchange rate," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(5), pages 713-740, October.
  33. Luca Antonio Ricci & Jaewoo Lee & Gian-Maria Milesi-Ferretti, 2008. "Real Exchange Rates and Fundamentals," IMF Working Papers 08/13, International Monetary Fund.
  34. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  35. de la Torre, Augusto & Gozzi, Juan Carlos & Schmukler, Sergio L., 2007. "Capital market development : whither Latin America ?," Policy Research Working Paper Series 4156, The World Bank.
  36. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  37. Pazarbasioglu, Ceyla & Otker, Inci, 1997. "Likelihood versus timing of speculative attacks: A case study of Mexico," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 837-845, April.
  38. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, Elsevier, vol. 77(2), pages 211-220, October.
  39. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 559-86, June.
  40. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 16(5), pages 971-989, November.
  41. Li L. Ong & Silvia Iorgova, 2008. "The Capital Markets of Emerging Europe," IMF Working Papers 08/103, International Monetary Fund.
  42. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers, Institute for Fiscal Studies W00/19, Institute for Fiscal Studies.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Wong, Sara A. & Petreski, Marjan, 2014. "Dutch Disease in Latin American countries: De-industrialization, how it happens, crisis, and the role of China," MPRA Paper 57056, University Library of Munich, Germany.
  2. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
  3. Hubert Gabrisch & Karsten Staehr, 2012. "The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries," Working Papers, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies) 324, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
  4. World Bank, 2012. "Using Lebanon's Large Capital Inflows to Foster Sustainable Long-Term Growth," World Bank Other Operational Studies 2727, The World Bank.
  5. Thomas Goda & Alejandro Torres, 2013. "Overvaluation of the real exchange rate and the Dutch Disease: the Colombian case," DOCUMENTOS DE TRABAJO CIEF, UNIVERSIDAD EAFIT 010930, UNIVERSIDAD EAFIT.
  6. Gabrisch, Hubert & Staehr, Karsten, 2014. "The euro plus pact: cost competitiveness and external capital flows in the EU countries," Working Paper Series, European Central Bank 1650, European Central Bank.
  7. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
  8. Karsten Staehr, 2010. "Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East," Bank of Estonia Working Papers, Bank of Estonia wp2010-04, Bank of Estonia, revised 22 Mar 2010.
  9. niaz ahmad mohd, Naseem & yusop, Zulkornain & masron, Tajul ariffin, 2009. "How did the Malaysian real exchange rate misalign during the 1997 Asian crisis?," MPRA Paper 44922, University Library of Munich, Germany.
  10. Heng, Dyna, 2011. "Does financial development reduce the motivation to hoard foreign reserves?," MPRA Paper 48555, University Library of Munich, Germany, revised 2012.
  11. Emmanuel K. K. Lartey, 2011. "Financial Openness and the Dutch Disease," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 15(3), pages 556-568, 08.
  12. Jarko Fidrmuc & Reiner Martin, 2011. "FDI, Trade and Growth in CESEE Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 70-89,112-1.
  13. Heng, Dyna & Corbett, Jenny, 2011. "What Drives Some Countries to Hoard Foreign Reserves?," MPRA Paper 48552, University Library of Munich, Germany, revised Oct 2011.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:09/20. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.