Capital Inflows, Inflation and Exchange Rate Volatility: An Investigation for Linear and Nonlinear Causal Linkages
AbstractSince the early 1990s, there is an upsurge in foreign capital flows to developing economies, particularly into emerging markets. One view argues that capital inflows do help to increase efficiency, a better allocation of capital and to fill up the investment-saving gap. Adherents to that view advise countries to launch capital account liberalisation. In this study, we investigate the effects of capital inflows on domestic price level, monetary expansion and exchange rate volatility. To proceed with this, linear and nonlinear cointegration and Granger causality tests are applied in a bi-variate as well as in multivariate framework. The key message of the analysis is that there is a significant inflationary impact of capital inflows, in particular during the last 7 years. The finding suggest that there is a need to manage the capital inflows in such a way that they should neither create an inflationary pressure in the economy nor fuel the exchange rate volatility.
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Bibliographic InfoPaper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2010:63.
Length: 23 pages
Date of creation: 2010
Date of revision:
Capital Inflows; Inflationary Pressures; Exchange Rate Volatility; Monetary Expansion; Nonlinear Dynamics;
Other versions of this item:
- Abdul Rashid & Fazal Husain, 2010. "Capital Inflows, Inflation and Exchange Rate Volatility : An Investigation for Linear and Nonlinear Causal Linkages," Macroeconomics Working Papers 22832, East Asian Bureau of Economic Research.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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