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Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

Author

Listed:
  • Mr. Olivier J Blanchard
  • Mr. Jonathan David Ostry
  • Mr. Atish R. Ghosh
  • Mr. Marcos d Chamon

Abstract

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically, and find support for the key predictions in the data.

Suggested Citation

  • Mr. Olivier J Blanchard & Mr. Jonathan David Ostry & Mr. Atish R. Ghosh & Mr. Marcos d Chamon, 2015. "Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence," IMF Working Papers 2015/226, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2015/226
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    WP; bond flow; exchange rate; central bank; rate of return; capital inflows; capital controls; foreign exchange intervention; bond inflow; inflows lead; FX intervention; exchange rate appreciation; Central bank policy rate; Bonds; Exchange rates; Global;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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