Testing for nonlinear causation between capital inflows and domestic prices
The nonlinear cointegration and Granger causality tests are applied in a bi-variate framework to investigate the effects of capital inflows, monetary expansion and interest rates on domestic price levels. The key message of the analysis is that there is a significant inflationary impact of capital inflows, money supply-to-GDP ratio and domestic debt, in particular during period of large capital inflows from 2001 to 2008. Whereas, interest rate and exchange rate do not have any significant nonlinear causal links with domestic price levels during the examined periods.
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