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The Consequences and Management of Capital Inflows: Lessons for Sub-Saharan Africa

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  • Reinhart, Carmen
  • Calvo, Guillermo

Abstract

Some of the questions that emerge from the African experiences were echoing those of capital-importing countries in other regions: To what extent are the capital inflows driven by external fundamentals? Or conversely, what role have domestic macroeconomic policies and structural reforms played in attracting (or repelling) the flows? What is the appropriate policy response? Are the high domestic real interest rates a byproduct of financial liberalization or of monetary policy? Is there evidence of regional “contagion effects?” Do capital inflows make the recipient economies more vulnerable to financial crises, such as those in Mexico in 1994-95 and in Asia in 1997-98? Other questions are more specific to the African experience: Why has SSA not attracted more flows, despite a substantive improvement in economic performance? What are the prerequisites for attracting portfolio flows? Are the policy instruments limited by the relatively undeveloped nature of the financial sector? Is an undeveloped financial sector an asset or a liability when it comes to avoiding Asian-style crises? The purpose of this paper is to answer some of these questions at both the conceptual level as well as in the African context. The paper presents a framework to analyze the macroeconomic effects of and the policy responses to a surge in capital inflows. We examine the monetary consequences, the implications for the exchange rate and domestic inflation, and the issue of the current account and its sustainability. The analysis places much emphasis on the role played by the financial sector and the stock market. At the empirical level, we investigate the possible links between the structure and depth of existing capital markets and the volume and composition of the capital flows a country attracts.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7901.

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Date of creation: 1999
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Handle: RePEc:pra:mprapa:7901

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  1. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America," IMF Working Papers 94/117, International Monetary Fund.
  2. Peter Wickham & Carmen Reinhart, 1994. "Commodity Prices," IMF Working Papers 94/7, International Monetary Fund.
  3. Carmen M. Reinhart & R. Todd Smith, 1996. "Too much of a good thing: the macroeconomic effects of taxing capital inflows," Proceedings, Federal Reserve Bank of San Francisco, pages 436-464.
  4. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  5. Asea, Patrick K & Reinhart, Carmen M, 1996. "Le Prix de l'Argent: How (Not) to Deal with Capital Inflows," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 231-71, October.
  6. Jeffrey A. Frankel & Sergio L. Schmukler, 1996. "Crisis, contagion, and country funds: effects on East Asia and Latin America," Proceedings, Federal Reserve Bank of San Francisco, pages 232-266.
  7. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
  8. Vicente Galbis, 1993. "High Real Interest Rates Under Financial Liberalization," IMF Working Papers 93/7, International Monetary Fund.
  9. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  10. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
  11. Montiel, Peter J, 1996. "Financial Policies and Economic Growth: Theory, Evidence and Country-Specific Experience from Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 65-98, October.
  12. Gikas A. Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1993. "What moves the discount on country equity funds?," Research Paper 9324, Federal Reserve Bank of New York.
  13. Ghura, Dhaneshwar & Grennes, Thomas J., 1993. "The real exchange rate and macroeconomic performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 42(1), pages 155-174, October.
  14. Carmen M. Reinhart & Peter Wickham, 1994. "Commodity Prices: Cyclical Weakness or Secular Decline?," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 175-213, June.
  15. Cuddington, John, 1989. "Commodity Export Booms in Developing Countries," World Bank Research Observer, World Bank Group, vol. 4(2), pages 143-65, July.
  16. Reuven Glick & Ramon Moreno, 1994. "Capital flows and monetary policy in East Asia," Pacific Basin Working Paper Series 94-08, Federal Reserve Bank of San Francisco.
  17. Guillermo A. Calvo, 1991. "The Perils of Sterilization," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 921-926, December.
  18. Reinhart, C.M. & Dunaway, S., 1996. "Dealing with Capital Inflows. Are There Any Lessons?," Research Paper 28, World Institute for Development Economics Research.
  19. Carlos F. Diaz-Alejandro, 1984. "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 335-403.
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Cited by:
  1. Miranda S Goeltom, 2008. "Capital flows in Indonesia: challenges and policy responses," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 265-287 Bank for International Settlements.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2002. "FDI to Africa: The role of price stability and currency instability," MPRA Paper 13872, University Library of Munich, Germany.
  3. Carlos Marinheiro, 2006. "Ricardian Equivalence, Twin Deficits, and the Feldstein-Horioka puzzle in Egypt," GEMF Working Papers 2006-07, GEMF - Faculdade de Economia, Universidade de Coimbra.

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