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An Empirical Investigation of Real Exchange Rate Responses to Foreign Currency Inflows: Revisiting the Dutch Disease Phenomenon in South Asia

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  • Muntasir Murshed

    (School of Business and Economics, North South University, Bangladesh)

  • Seemran Rashid

    (School of Business and Economics, North South University, Bangladesh)

Abstract

Inflows of foreign currencies into the developing economies, in particular, have been associated with the Dutch disease phenomenon whereby a surge in such inflows is believed to stimulate real appreciation of the real exchange rate. As a result, there could be deindustrialization impacts on the recipient economies following a growth in the non-tradable sector at the expense of the tradable sector's contraction. This paper empirically investigates the dynamics of real exchange rate responses to official development assistance, foreign direct investments and international remittances flowing into the four emerging South Asian economies Bangladesh, India, Pakistan, and Sri Lanka. The results from the extensive econometric analyses show that a 1% rise in the total volume of official development assistance and remittances received appreciates the real exchange rate by 0.18% and 0.23% respectively. In contrast, a 1% rise in FDI inflows was found to trigger a 0.19% depreciation of the real exchange rate. Furthermore, the Dumitrescu and Hurlin (2012) test results reveal unidirectional long run causalities running from official development assistances and FDI inflow to real exchange rate while certifying a bidirectional causal association between inward international remittances and the real exchange rate.

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  • Muntasir Murshed & Seemran Rashid, 2020. "An Empirical Investigation of Real Exchange Rate Responses to Foreign Currency Inflows: Revisiting the Dutch Disease Phenomenon in South Asia," The Economics and Finance Letters, Conscientia Beam, vol. 7(1), pages 23-46.
  • Handle: RePEc:pkp:teafle:2020:p:23-46
    DOI: 10.18488/journal.29.2020.71.23.46
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    More about this item

    Keywords

    Dutch disease; Foreign exchange inflows; Real exchange rate; Foreign aid; Remittance; Foreign direct investment; Causality.;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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