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Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate

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  • Jean-Louis Combes
  • Patrick Plane
  • Tidiane Kinda

Abstract

This paper analyzes the impact of capital inflows and exchange rate flexibility on the real exchange rate in developing countries based on panel cointegration techniques. The results show that public and private flows are associated with a real exchange rate appreciation. Among private flows, portfolio investment has the highest appreciation effect-almost seven times that of foreign direct investment or bank loans-and private transfers have the lowest 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 exchange rate stemming from capital inflows.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/9.

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Length: 34
Date of creation: 01 Jan 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/9

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Keywords: Private capital flows; Emerging markets; Capital inflows; Developing countries; Economic models; Exchange rate appreciation; Exchange rate regimes; External financing; Flexible exchange rates; Real effective exchange rates; exchange rate; real exchange rate; exchange rate flexibility; capital flows; private flows; real appreciation; composition of capital inflows; private capital; real effective exchange rate; nominal exchange rate; exchange rate regime; exchange rates; effective exchange rate; foreign exchange; private capital inflows; flexible exchange rate; real exchange rate appreciation; real exchange rates; official flows; capital inflow; capital movements; capital flow; commercial bank loans; nominal effective exchange rate; capital outflow; foreign exchange market; foreign capital inflows; exchange rate determination; exchange rate volatility; capital controls; floating exchange rate system; foreign capital; exchange rate system; floating exchange rate; exchange rate misalignment; intermediate exchange rate; short-term capital; equilibrium exchange rate; floating system; excess demand; exchange rate behavior; corporate bonds; effective exchange rates; current account deficit; intermediate regimes; current account deficits; real exchange rate behavior; exchange reserves; foreign investment; capital control; nominal bilateral exchange rate; net capital; foreign exchange reserves; intermediate exchange rate regime; external capital; fixed exchange rate; fixed exchange rates; exchange rate adjustments; bilateral exchange rate; debt securities; government bonds; flexible exchange rate regime;

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References

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Citations

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Cited by:
  1. Andrew Powell & Pilar Tavella, 2012. "Capital Inflow Surges in Emerging Economies: How Worried Should LAC Be?," Research Department Publications 4782, Inter-American Development Bank, Research Department.
  2. Jorg Bibow, 2011. "Permanent and Selective Capital Account Management Regimes as an Alternative to Self-Insurance Strategies in Emerging-market Economies," Economics Working Paper Archive wp_683, Levy Economics Institute.
  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. Maroula Khraiche & Jeffrey Gaudette, 2013. "FDI, Exchange Rate Volatility and Financial Development: Regional Differences In Emerging Economies," Economics Bulletin, AccessEcon, vol. 33(4), pages 3143-3156.

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