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The Consequences and Management of Capital Inflows: Lessons for Sub-Saharan Africa


  • Reinhart, Carmen
  • Calvo, Guillermo


Some of the questions that emerge from the African experiences were echoing those of capital-importing countries in other regions: To what extent are the capital inflows driven by external fundamentals? Or conversely, what role have domestic macroeconomic policies and structural reforms played in attracting (or repelling) the flows? What is the appropriate policy response? Are the high domestic real interest rates a byproduct of financial liberalization or of monetary policy? Is there evidence of regional “contagion effects?” Do capital inflows make the recipient economies more vulnerable to financial crises, such as those in Mexico in 1994-95 and in Asia in 1997-98? Other questions are more specific to the African experience: Why has SSA not attracted more flows, despite a substantive improvement in economic performance? What are the prerequisites for attracting portfolio flows? Are the policy instruments limited by the relatively undeveloped nature of the financial sector? Is an undeveloped financial sector an asset or a liability when it comes to avoiding Asian-style crises? The purpose of this paper is to answer some of these questions at both the conceptual level as well as in the African context. The paper presents a framework to analyze the macroeconomic effects of and the policy responses to a surge in capital inflows. We examine the monetary consequences, the implications for the exchange rate and domestic inflation, and the issue of the current account and its sustainability. The analysis places much emphasis on the role played by the financial sector and the stock market. At the empirical level, we investigate the possible links between the structure and depth of existing capital markets and the volume and composition of the capital flows a country attracts.

Suggested Citation

  • Reinhart, Carmen & Calvo, Guillermo, 1999. "The Consequences and Management of Capital Inflows: Lessons for Sub-Saharan Africa," MPRA Paper 7901, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:7901

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    References listed on IDEAS

    1. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
    2. Asea, Patrick K & Reinhart, Carmen M, 1996. "Le Prix de l'Argent: How (Not) to Deal with Capital Inflows," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 231-271, October.
    3. Carmen M. Reinhart & R. Todd Smith, 1996. "Too much of a good thing: the macroeconomic effects of taxing capital inflows," Proceedings, Federal Reserve Bank of San Francisco, pages 436-464.
    4. Reuven Glick & Ramon Moreno, 1994. "Capital flows and monetary policy in East Asia," Pacific Basin Working Paper Series 94-08, Federal Reserve Bank of San Francisco.
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
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    8. Carmen M. Reinhart & Peter Wickham, 1994. "Commodity Prices: Cyclical Weakness or Secular Decline?," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 175-213, June.
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    11. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America; From Banking Crisis Resolution to Current Policy Challenges," IMF Working Papers 94/117, International Monetary Fund.
    12. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters,in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
    13. Montiel, Peter J, 1996. "Financial Policies and Economic Growth: Theory, Evidence and Country-Specific Experience from Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 65-98, October.
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    Cited by:

    1. Folorunso S. Ayadi, 2010. "Sectoral analysis of Foreign Direct Investment and economic growth in Nigeria," International Journal of Trade and Global Markets, Inderscience Enterprises Ltd, vol. 3(4), pages 327-340.
    2. Wakilat Olabisi Balogun & Jauhari B. Dahalan & Sallahuddin B. Hassan, 2016. "Interest Rate Liberalization, Quality institutions and Stock Market Development in Selected Sub-Saharan African Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 786-792.
    3. Marinheiro, Carlos Fonseca, 2008. "Ricardian equivalence, twin deficits, and the Feldstein-Horioka puzzle in Egypt," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1041-1056.
    4. Reinhart, Carmen & Rogoff, Kenneth, 2002. "FDI to Africa: The role of price stability and currency instability," MPRA Paper 13872, University Library of Munich, Germany.
    5. Nizar, Muhammad Afdi, 2007. "Aliran Modal Masuk (Capital Inflows) Dan Implikasinya Bagi Perekonomian Indonesia
      [The Implications of the Capital Inflows on Indonesian Economy]
      ," MPRA Paper 65905, University Library of Munich, Germany.
    6. Miranda S Goeltom, 2008. "Capital flows in Indonesia: challenges and policy responses," BIS Papers chapters,in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 265-287 Bank for International Settlements.
    7. Kinda, Tidiane, 2008. "Les déterminants des flux de capitaux privés dans l’UMOA: Une approche empirique sur données de panel
      [The determinants of private capital inflows in WAEMU: A panel data approach]
      ," MPRA Paper 19159, University Library of Munich, Germany.
    8. Okpara, Godwin Chigozie, 2012. "On whether foreign direct investment catalyzes economic development in Nigeria," MPRA Paper 36319, University Library of Munich, Germany, revised 27 Jan 2012.
    9. Calvo, Guillermo A, 2001. "Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 312-334, May.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook


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