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Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate

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  • Jean-Louis Combes
  • Patrick Plane
  • Mr. Tidiane Kinda

Abstract

This paper analyzes the impact of capital inflows and exchange rate flexibility on the real exchange rate in developing countries based on panel cointegration techniques. The results show that public and private flows are associated with a real exchange rate appreciation. Among private flows, portfolio investment has the highest appreciation effect-almost seven times that of foreign direct investment or bank loans-and private transfers have the lowest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real exchange rate stemming from capital inflows.

Suggested Citation

  • Jean-Louis Combes & Patrick Plane & Mr. Tidiane Kinda, 2011. "Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate," IMF Working Papers 2011/009, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2011/009
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    More about this item

    Keywords

    WP; nominal exchange rate; Private capital flows; real exchange rate; exchange rate flexibility; emerging markets; low-income countries; pooled mean group estimator; REER appreciation; appreciation effect; FDI flow; exchange rate volatility; exchange rate determination model; index of exchange rate flexibility; appreciation of the real effective exchange rate; exchange rate regime choice; exchange rate system; income effect; exchange rate flexibility variable; dependent variable; Real exchange rates; Capital inflows; Real effective exchange rates; Exchange rate arrangements; Asia and Pacific; Global;
    All these keywords.

    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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