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Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa

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  • Emmanuel K. K. Lartey

Abstract

This paper investigates the question of whether capital inflows, particularly Foreign Direct Investment (FDI), cause the real exchange rate to appreciate. It also examines whether different forms of captial inflow have variable effects on the real exchange rate. The paper estimates an empirical real exchange rate model specifying a set of capital inflow variables using dynamic panel techniques. Based on data for a sample of sub-Saharan African countries for the period 1980 - 2000, the study reveals FDI as the category of private capital inflow that causes the real exchange rate to appreciate. The results also show that an increase in official aid causes a real appreciation, the magnitude being greater compared to that associated with FDI.

Suggested Citation

  • Emmanuel K. K. Lartey, 2007. "Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 16(3), pages 337-357.
  • Handle: RePEc:taf:jitecd:v:16:y:2007:i:3:p:337-357
    DOI: 10.1080/09638190701526667
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ebghaei, Felor, 2013. "مديريت عوامل موثر بر سرمايه گذاري بخش خصوصي در ايران
      [Management of Determinant Factors on Private Investment in Iran]
      ," MPRA Paper 77908, University Library of Munich, Germany, revised Mar 2017.
    2. Carl Grekou, 2014. "On the effectiveness of devaluations in emerging and developing countries," EconomiX Working Papers 2014-61, University of Paris Nanterre, EconomiX.
    3. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
    4. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
    5. Pilar Poncela & Eva Senra & Lya Paola Sierra, 2017. "Long-term links between raw materials prices, real exchange rate and relative de-industrialization in a commodity-dependent economy: empirical evidence of “Dutch disease” in Colombia," Empirical Economics, Springer, vol. 52(2), pages 777-798, March.
    6. Pedro M G Martins, "undated". "Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Discussion Papers 10/07, University of Nottingham, CREDIT.
    7. Shahid Hussain Javaid, 2009. "Dutch Disease Investigated: Empirical Evidence from Selected South-East Asian Economies," SBP Working Paper Series 31, State Bank of Pakistan, Research Department.
    8. Emmanuel K. K. Lartey, 2011. "Financial Openness and the Dutch Disease," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 556-568, August.
    9. Pedro M. G. Martins, 2010. "Do Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia," Working Paper Series 1110, Department of Economics, University of Sussex.
    10. Farid Makhlouf & Mazhar Mughal, 2013. "Remittances, Dutch Disease, And Competitiveness: A Bayesian Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 67-97, June.
    11. Christian Saborowski, 2009. "Capital Inflows and the Real Exchange Rate; Can Financial Development Cure the Dutch Disease?," IMF Working Papers 09/20, International Monetary Fund.
    12. Pedro Martins, 2011. "Do large capital inflows hinder competitiveness? The Dutch disease in Ethiopia," Post-Print hal-00748067, HAL.
    13. Mouhamadou Sy & Hamidreza Tabarraei, 2010. "Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited," PSE Working Papers halshs-00574955, HAL.
    14. Shashank Goel & V. Raveendra Saradhi, 2015. "Capital Flow Components and the Real Exchange Rate: Implications for India," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 14(2), pages 179-194, December.
    15. 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.
    16. Nuno Baetas da Silva & João Sousa Andrade & António Portugal Duarte, 2016. "Alternative Sources of Dutch Disease: A Survey of the Literature," GEMF Working Papers 2016-10, GEMF, Faculty of Economics, University of Coimbra.
    17. Jean-Louis COMBES & Patrick PLANE & Tidiane KINDA, 2010. "Capital Flows and their Impact on the Real Effective Exchange Rate," Working Papers 201032, CERDI.
    18. Ben Naceur, Sami & Bakardzhieva, Damyana & Kamar, Bassem, 2012. "Disaggregated Capital Flows and Developing Countries’ Competitiveness," World Development, Elsevier, vol. 40(2), pages 223-237.
    19. Mouhamadou Sy & Hamidreza Tabarraei, 2010. "Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited," Working Papers halshs-00574955, HAL.

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