Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America
AbstractThe nexus of real exchange rate (RER) and capital inflows is examined through a comparative analysis of the experiences of emerging market economies in Asian and Latin America during the period 1985-2000. It is found that the degree of appreciation in RER associated with capital inflow is uniformly much higher in Latin American countries compared to their Asian counterparts, despite the fact that the latter experienced far greater foreign capital inflows relative to the size of the economy. The econometric evidence suggests that both the composition of capital flows and differences in the degree of response of RER to capital flows matter in explaining these contrasting experiences. While RER appreciation is a phenomenon predominantly associated with other (non-FDI) forms of capital inflows (OCFW), a given level of OCFW brings about a far greater degree of appreciation of the real exchange rate in Latin America where the importance of these flows in total capital inflow is also far greater. On the policy front, Asian countries seem to have used fiscal contraction and nominal exchange rate adjustment more effectively to cushion the RER against the appreciation pressure of capital inflows. There is, however, no evidence to suggest that sterilized intervention can generate a lasting impact on the real exchange rate.
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Bibliographic InfoPaper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2003-02.
Length: 34 pages
Date of creation: 2003
Date of revision:
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real exchange rate; capital flows; foreign direct investment;
Other versions of this item:
- 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, vol. 26(4), pages 613-637, 04.
- NEP-ALL-2004-01-08 (All new papers)
- NEP-FIN-2004-01-08 (Finance)
- NEP-IFN-2004-01-08 (International Finance)
- NEP-MAC-2004-01-08 (Macroeconomics)
- NEP-SEA-2004-01-08 (South East Asia)
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