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Capital Inflows

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  • Selim Elekdag
  • M. Ayhan Kose
  • Roberto Cardarelli

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

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/40.

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Length: 62
Date of creation: 01 Mar 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/40

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Keywords: Capital inflows; Capital controls; Emerging markets; Current account deficits; exchange rate; private capital inflows; private capital; capital flows; real appreciation; capital inflow; exchange rate appreciation; real exchange rate; current account balance; capital outflows; net capital; exchange rates; real effective exchange rate; foreign exchange; real exchange rate appreciation; capital mobility; exchange rate regimes; private capital flows; capital inflow episodes; international capital; currency appreciation; effective exchange rate; exchange rate policy; private capital inflow; net capital flows; capital movements; capital account liberalization; foreign capital; foreign exchange market; exchange rate flexibility; international capital flows; nominal exchange rate; capital markets; exchange arrangements; exchange rate policies; exchange rate fluctuations; exchange restrictions; mixed blessing of capital inflows; current account deficit; exchange rate volatility; capital transactions; international capital markets; composition of capital inflows; exchange rate changes; capital flow; private inflows; capital control; volatile capital flows; access to international capital; cost of capital; exchange rate appreciations; access to international capital markets; movements in exchange rates; volatile capital; speculative capital inflows; exchange rate index; exchange rate change; exchange market intervention; speculative capital; foreign exchange markets; capital account restrictions; relative exchange rate; domestic credit; exchange rate intervention; excess supply; exchange rate movements; currency areas; inflexible exchange rate; currency markets; exchange rate arrangements; capital accounts; openness to capital flows; exchange reserves; nominal exchange rates; exchange rate variability; classification of exchange rate; international borrowing; full capital mobility; effective exchange rates; nominal bilateral exchange rate; speculative attacks; investor confidence; commodity prices; net capital outflows; market exchange rate; bilateral exchange rate; exchange rate transaction; foreign exchange reserves; flexible exchange rate policy; exchange markets; flexible exchange rate; external capital; massive capital inflows; exchange controls; history of exchange rate; real exchange rate appreciations;

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References

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