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Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America

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  • Prema-chandra Athukorala

    ()

  • Sarath Rajapatirana

    ()

Abstract

The 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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File URL: https://crawford.anu.edu.au/acde/publications/publish/papers/wp2003/wp-econ-2003-02.pdf
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Bibliographic Info

Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2003-02.

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Length: 34 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:pas:papers:2003-02

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Keywords: real exchange rate; capital flows; foreign direct investment;

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  1. Robert E. Lipsey & Robert C. Feenstra & Carl H. Hahn & George N. Hatsopoulos, 1999. "The Role of Foreign Direct Investment in International Capital Flows," NBER Chapters, in: International Capital Flows, pages 307-362 National Bureau of Economic Research, Inc.
  2. Anne O. Krueger, 1997. "Trade Policy and Economic Development: How We Learn," NBER Working Papers 5896, National Bureau of Economic Research, Inc.
  3. Sebastian Edwards, 2000. "Introduction to "Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies"," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 1-12 National Bureau of Economic Research, Inc.
  4. Corden, W. Max, 1994. "Economic Policy, Exchange Rates, and the International System," OUP Catalogue, Oxford University Press, number 9780198774099.
  5. Suma Athreye & Sandeep Kapur, 2001. "Private Foreign Investment in India: Pain or Panacea?," The World Economy, Wiley Blackwell, vol. 24(3), pages 399-424, 03.
  6. Prema-chandra Athukorala & Peter G. Warr, 2002. "Vulnerability to a Currency Crisis: Lessons from the Asian Experience," The World Economy, Wiley Blackwell, vol. 25(1), pages 33-57, 01.
  7. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
  8. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  9. Sebastian Edwards, 2000. "Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies," NBER Books, National Bureau of Economic Research, Inc, number edwa00-1, May.
  10. Carmen Reinhart & Guillermo Calvo & Leonardo Leiderman, 1992. "Capital Inflows to Latin America," IMF Working Papers 92/85, International Monetary Fund.
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