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

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  • Mr. Bassem M Kamar
  • Damyana Bakardzhieva
  • Sami 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

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

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    1. Yongzheng Yang & Mr. Robert Powell & Mr. Sanjeev Gupta, 2005. "The Macroeconomic Challenges of Scaling Up Aid to Africa," IMF Working Papers 2005/179, International Monetary Fund.
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    1. Maja Bukovšak & Gorana Lukinić Čardić & Nina Pavić, 2020. "Structure of capital flows and exchange rate: the case of Croatia," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 113-146, February.
    2. Heng, Dyna, 2011. "Capital flows and real exchange rate: does financial development matter?," MPRA Paper 48553, University Library of Munich, Germany, revised May 2012.
    3. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
    4. 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.
    5. 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.
    6. Kojo, Naoko C., 2014. "Demystifying Dutch disease," Policy Research Working Paper Series 6981, The World Bank.
    7. Shashank Goel & V. Raveendra Saradhi, 2015. "Capital Flow Components and the Real Exchange Rate: Implications for India," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 14(2), pages 179-194, December.
    8. Carlos A. Ibarra, 2013. "Capital Flows and Private Investment in Mexico," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(3, Cierre), pages 65-99.
    9. Özcan KARAHAN & Olcay ÇOLAK, 2019. "The link between financial capital movements and the exchange rate in Turkey," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 10, pages 263-281, December.
    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. Pınar Yeşin, 2017. "Capital Flows and the Swiss Franc," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 153(4), pages 403-436, October.
    12. 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.
    13. Cristina Fernández Mejía & Leonardo Villar Gómez, 2014. "Temporary Resource Booms and Manufacturing Output: A Global Perspective," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(2), pages 161-216, July-Dece.
    14. Coletta Frenzel Baudisch, 2018. "Sectoral FDI and the Real Exchange Rate: The Role of Financial Development," MAGKS Papers on Economics 201828, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    15. Hubert Gabrisch, 2015. "Net Capital Flows To And The Real Exchange Rate Of Western Balkan Countries," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 60(205), pages 31-52, April – J.
    16. Hubert Gabrisch & Karsten Staehr, 2014. "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries. WWWforEurope Policy Paper No. 15," WIFO Studies, WIFO, number 47496, April.
    17. Naoko C. Kojo, 2015. "Demystifying Dutch Disease," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 1-23.
    18. Gabrisch, Hubert & Staehr, Karsten, 2014. "The euro plus pact: cost competitiveness and external capital flows in the EU countries," Working Paper Series 1650, European Central Bank.
    19. 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.
    20. Ho-Don Yan & Li-Ju Chen & Yi-Heng Tseng, 2014. "Capital Inflow, Foreign Exchange Intervention, and Currency Misalignment in Emerging Market Countries," China Economic Policy Review (CEPR), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-30.
    21. Pilar Beneito & Carlos Cháfer, 2020. "Capital Inflows and Costs: The Role of the Euro," Open Economies Review, Springer, vol. 31(5), pages 977-1008, November.
    22. Adugna Olani, 2016. "Dynamic Capital Inflow Transmission Of Monetary Policy To Emerging Markets," Working Paper 1358, Economics Department, Queen's University.
    23. Mirzosaid Sultonov, 2020. "The causality relationship between remittances and the real effective exchange rate: the case of the Kyrgyz Republic," International Journal of Economic Policy Studies, Springer, vol. 14(1), pages 167-177, February.

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