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The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries

Author

Listed:
  • Bassem M Kamar
  • Damyana Bakardzhieva
  • Samy Ben Naceur
  • Sami Ben Naceur

Abstract

Attracting capital and foreign exchange flows is crucial for developing countries. Yet, these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness, jeopardizing exports and growth. This paper investigates this dilemma by comparing the impact of six types of capital and foreign exchange flows on real exchange rate behavior in a sample of 57 developing countries covering Africa, Europe, Asia, Latin America, and the Middle East. The results reveal that portfolio investments, foreign borrowing, aid, and income lead to real exchange rate appreciation, while remittances have disparate effects across regions. Foreign direct investments have no effect on the real exchange rate, contributing to resolve the above dilemma.

Suggested Citation

  • Bassem M Kamar & Damyana Bakardzhieva & Samy Ben Naceur & Sami Ben Naceur, 2010. "The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries," IMF Working Papers 10/154, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/154
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    Citations

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    Cited by:

    1. Pinar Yesin, 2016. "Capital Flows and the Swiss Franc," Working Papers 16.04, Swiss National Bank, Study Center Gerzensee.
    2. Hubert Gabrisch & Karsten Staehr, 2015. "The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries," Journal of Common Market Studies, Wiley Blackwell, vol. 53(3), pages 558-576, May.
    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. Hubert Gabrisch & Karsten Staehr, 2014. "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries," WWWforEurope Policy Paper series 15, WWWforEurope.
    5. Carlos A. Ibarra, 2014. "Trade, investment, and capital flows:Mexico's macroeconomic adjustment to the Great Recession," Working Paper Series Sobre México 2014002, Sobre México. Temas en economía.
    6. repec:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500101 is not listed on IDEAS
    7. Hubert Gabrisch, 2015. "Net Capital Flows To And The Real Exchange Rate Of Western Balkan Countries," Economic Annals, Faculty of Economics, University of Belgrade, vol. 60(205), pages 31-52, April – J.
    8. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
    9. Aizenman, Joshua & Binici, Mahir, 2016. "Exchange market pressure in OECD and emerging economies: Domestic vs. external factors and capital flows in the old and new normal," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 65-87.
    10. Pilar Beneito & Carlos Chafer, 2017. "Current Account Imbalances and Cost Competitiveness: The Role of the Euro," Working Papers 1703, Department of Applied Economics II, Universidad de Valencia.
    11. Adugna Olani, 2016. "Dynamic Capital inflow transmission of monetary policy to emerging markets," Working Papers 1358, Queen's University, Department of Economics.
    12. repec:spr:sjecst:v:153:y:2017:i:4:d:10.1007_bf03399513 is not listed on IDEAS
    13. DJAHINI, Edém, 2015. "Les principaux déterminants de la compétitivité internationale en Afrique Sub-saharienne
      [The main determinants of international competitiveness in Sub-Saharan Africa]
      ," MPRA Paper 65024, University Library of Munich, Germany, revised 16 Jun 2015.
    14. Cristina Fernández Mejía & Leonardo Villar Gómez, 2014. "Temporary Resource Booms and Manufacturing Output: A Global Perspective," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 161-216, July-Dece.
    15. Kojo, Naoko C., 2014. "Demystifying Dutch disease," Policy Research Working Paper Series 6981, The World Bank.
    16. 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.
    17. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, , vol. 0(3, Cierre), pages 65-99.
    18. repec:wsi:jicepx:v:06:y:2015:i:02:n:s1793993315500106 is not listed on IDEAS

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