The surge in capital inflows to developing countries : prospects and policy response
AbstractAfter being excluded from world capital markets during the debt crisis, many developing countries have experienced large capital inflows in the past five years. The challenges these inflows pose for domestice policy have generated a substantial literature. The authors review and extend that literature. They characterize the new inflows, assess their causes and the likelihood of sustainability, analyze the policy issues they raise, and evaluate the possible policy responses. Their conclusions tie desirable policy responses to characteristics of both the flows themselves and to those of the recipient economy. Regarding the forces driving the current episode, they conclude that generally, the role of foreign interest rates as a"push"factor driving capital inflows and determining their magnitude has been well-established. On the other hand, country creditworthiness has helped determine both the timing and destination of the new capital flows. Even if creditworthiness is maintained, the early level of inflows is unlikely to be sustained. The pace of reduction in flows to countries that have been receiving them since the early 1990s depends on the path of foreign interest rates and the role of stock adjustment. But a loss of creditworthiness caused by a deterioration in domestic policy would stop inflows quickly and, depending on the circumstances, inflows may be replaced by substantial outflows and an outright balance of payments crisis.What are the implications for policy in recipient countries? Briefly, the receipt of capital inflows may strengthen the case for removing macroeconomic distortions, either because such inflows aggravate the cost ofsuch distortions or because they ease the constraints that originally motivated their adoption. While direct intervention may not be feasible (because controls may be easily evaded), controls may sometimes be a second-best policy. To the extent that capital inflows are permitted to materialize, the desirability of foreign exhcange intervention depends on what is required for macroeconomic stability. Sterilized foreign exchange intervention to prevent overstimulation of demand with a fixed exchange rate may not be feasible or effective. A commensurate reduction in the money multiplier, achieved by increasing reserve requirements, may also have limited effects. The effectiveness of both measures depends on the structure of the domestic financial system. If domestic monetary expansion is not avoided, or if an expansionary financial stimulus is transmitted outside the banking system, the stabilization of total demand will require fiscal contraction.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 1473.
Date of creation: 30 Jun 1995
Date of revision:
International Terrorism&Counterterrorism; Capital Markets and Capital Flows; Economic Theory&Research; Fiscal&Monetary Policy; Banks&Banking Reform; Economic Theory&Research; Macroeconomic Management; Banks&Banking Reform; Environmental Economics&Policies; International Terrorism&Counterterrorism;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fernandez-Arias, Eduardo & DEC, 1994.
"The new wave of private capital inflows : push or pull?,"
Policy Research Working Paper Series
1312, The World Bank.
- Fernandez-Arias, Eduardo, 1996. "The new wave of private capital inflows: Push or pull?," Journal of Development Economics, Elsevier, vol. 48(2), pages 389-418, March.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993.
"“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,"
7125, University Library of Munich, Germany.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
- Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Working Papers 92/62, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994.
"The capital inflows problem: Concepts and issues,"
13902, University Library of Munich, Germany.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "Capital Inflows to Latin America: The 1970s and 1990s," MPRA Paper 8196, University Library of Munich, Germany.
- Michael P. Dooley & Eduardo Fernandez-Arias & Kenneth M. Kletzer, 1994. "Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?," NBER Working Papers 4792, National Bureau of Economic Research, Inc.
- Miriam Altman, 2001. "Employment promotion in a minerals economy," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(6), pages 691-709.
- Natalia T. Tamirisa, 2004. "Do Macroeconomic Effects of Capital Controls Vary by Their Type? Evidence from Malaysia," IMF Working Papers 04/3, International Monetary Fund.
- Mark Carlson & Leonardo Hernandez, 2002. "Determinants and repercussions of the composition of capital inflows," International Finance Discussion Papers 717, Board of Governors of the Federal Reserve System (U.S.).
- Flôres Junior, Renato Galvão & Araújo, Carlos Hamilton Vasconcelos, 2002. "Foreign funding to an emerging market: the Monetary Premium Theory and the Brazilian Case, 1991 - 1998," Economics Working Papers (Ensaios Economicos da EPGE) 459, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
- Leonardo Hernández & Heinz Rudolph, 1997. "Sustainability of Private Capital Flows to Developing Countries: Is a Generalized Reversal Likely?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 34(102), pages 237-266.
- Honig, Adam, 2008. "Do improvements in government quality necessarily reduce the incidence of costly sudden stops?," Journal of Banking & Finance, Elsevier, vol. 32(3), pages 360-373, March.
- Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
- Uluc Aysun & Adam Honig, 2008.
"Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops,"
2008-41, University of Connecticut, Department of Economics.
- Aysun, Uluc & Honig, Adam, 2011. "Bankruptcy costs, liability dollarization, and vulnerability to sudden stops," Journal of Development Economics, Elsevier, vol. 95(2), pages 201-211, July.
- Goldstein, Morris, 1995. "Coping with too much of a good thing : policy responses for large capital inflows in developing countries," Policy Research Working Paper Series 1507, The World Bank.
- Chuhan, Punam & Perez-Quiros, Gabriel & Popper, Helen, 1996. "International capital flows : do short-term investment and direct investment differ?," Policy Research Working Paper Series 1669, The World Bank.
- Hernandez, Leonardo & Rudolph, Heinz, 1995. "Sustainability of private capital flows to developing countries : Is a generalized reversal likely?," Policy Research Working Paper Series 1518, The World Bank.
- Goopu, Sudarshan, 1996. "The analysis of emerging policy issues in development finance," Policy Research Working Paper Series 1589, The World Bank.
- Celasun, Oya & Denizer, Cevdet & Dong He, 1999. "Capital flows, macroeconomic management, and the financial system - Turkey, 1989-97," Policy Research Working Paper Series 2141, The World Bank.
- Steven B. Kamin & Paul R. Wood, 1997. "Capital inflows, financial intermediation, and aggregate demand," International Finance Discussion Papers 583, Board of Governors of the Federal Reserve System (U.S.).
- Louis Kasekende & Damoni Kitabire & Matthew Martin, 1998. "Capital Inflows and Macroeconomic Policy in Sub-Saharan Africa," Macroeconomics 9809005, EconWPA.
- John T. Cuddington & Hong Liang & Shihua Lu, 1996. "Uncertainty, Trade, and Capital Flows in Sub-Saharan Africa," International Finance 9602002, EconWPA.
- Brahmbhatt, Milan & Srinivasan, T.G. & Murrell, Kim, 1996. "India in the global economy," Policy Research Working Paper Series 1681, The World Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.