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Capital flows, exchange rate flexibility, and the real exchange rate

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  • Combes, Jean-Louis
  • Kinda, Tidiane
  • Plane, Patrick

Abstract

This paper first analyzes the impact of capital inflows on the real effective exchange rate for a sample of 42 emerging and developing countries over the period 1980–2006. The results from the pooled mean group estimator show that both public and private inflows are associated with an appreciation of the real effective exchange rate. Among private inflows, portfolio investments display the biggest impact on the appreciation – almost seven times that of foreign direct investment or bank loans – while private transfers have the smallest effect. The paper also shows that a more flexible exchange rate regime, measured by different indicators, could effectively dampen the real appreciation associated with capital inflows, supporting countries’ competitiveness.

Suggested Citation

  • Combes, Jean-Louis & Kinda, Tidiane & Plane, Patrick, 2012. "Capital flows, exchange rate flexibility, and the real exchange rate," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1034-1043.
  • Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:1034-1043
    DOI: 10.1016/j.jmacro.2012.08.001
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    More about this item

    Keywords

    Capital flows; Real effective exchange rate; Exchange rate flexibility; Emerging markets; Developing countries; Panel cointegration;

    JEL classification:

    • 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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