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The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries

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Author Info

  • Bassem Kamar
  • Damyana Bakardzhieva
  • Samy Ben Naceur
  • Sami Ben Naceur

Abstract

Attracting capital and foreign exchange flows is crucial for developing countries. Yet, these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness, jeopardizing exports and growth. This paper investigates this dilemma by comparing the impact of six types of capital and foreign exchange flows on real exchange rate behavior in a sample of 57 developing countries covering Africa, Europe, Asia, Latin America, and the Middle East. The results reveal that portfolio investments, foreign borrowing, aid, and income lead to real exchange rate appreciation, while remittances have disparate effects across regions. Foreign direct investments have no effect on the real exchange rate, contributing to resolve the above dilemma.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/154.

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Length: 30
Date of creation: 01 Jul 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/154

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Related research

Keywords: Capital flows; Developing countries; Foreign exchange; Real effective exchange rates; Trade liberalization; Global competitiveness; Terms of trade; Productivity; reer; real exchange rate; exchange rate appreciation; real exchange rate appreciation; real exchange rates; exchange rate regimes; price of exports; export sector; exchange rate depreciation; nominal exchange rate; export orientation; oil exporting countries; oil exports; net exports; trade liberalisation; real exchange rate overvaluation; nominal exchange rate depreciation; open economy macroeconomics; fixed exchange rate regimes; exchange rate behavior; competitiveness of export; real exchange rate behavior; exchange rate interventions; exchange rate management; capital ? flows;

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Cited by:
  1. Gabrisch, Hubert & Staehr, Karsten, 2014. "The euro plus pact: cost competitiveness and external capital flows in the EU countries," Working Paper Series 1650, European Central Bank.
  2. Hubert Gabrisch & Karsten Staehr, 2012. "The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries," Working Papers 324, Institut f├╝r Ost- und S├╝dosteuropaforschung (Institute for East and South-East European Studies).
  3. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
  4. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.

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