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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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7901.

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Date of creation: 1999
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Handle: RePEc:pra:mprapa:7901
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  1. Gikas A. Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1993. "What Moves the Discount on Country Equity Funds?," NBER Working Papers 4571, National Bureau of Economic Research, Inc.
  2. 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.
  3. Reinhart, Carmen & Smith, R. Todd, 1998. "Too much of a good thing: The macroeconomic effects of taxing capital inflows," MPRA Paper 13234, University Library of Munich, Germany.
  4. Ghura, Dhaneshwar & Grennes, Thomas J., 1993. "The real exchange rate and macroeconomic performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 42(1), pages 155-174, October.
  5. Guillermo A. Calvo, 1991. "The Perils of Sterilization," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 921-926, December.
  6. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
  7. Vicente Galbis, 1993. "High Real Interest Rates Under Financial Liberalization: Is there a Problem?," IMF Working Papers 93/7, International Monetary Fund.
  8. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
  9. Carlos F. Diaz-Alejandro, 1984. "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 335-403.
  10. Reinhart, Carmen & Wickham, Peter, 1994. "Non-oil commodity prices: Cyclical weakness or secular decline?," MPRA Paper 13871, University Library of Munich, Germany.
  11. Reinhart, Carmen & Dunnaway, Steve, 1996. "Dealing with capital inflows: Are there any lessons?," MPRA Paper 13764, University Library of Munich, Germany.
  12. Jeffrey A. Frankel & Sergio L. Schmukler, 1996. "Crisis, contagion, and country funds: effects on East Asia and Latin America," Proceedings, Federal Reserve Bank of San Francisco, pages 232-266.
  13. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  14. Cuddington, John, 1989. "Commodity Export Booms in Developing Countries," World Bank Research Observer, World Bank Group, vol. 4(2), pages 143-65, July.
  15. 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.
  16. 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.
  17. Montiel, P.J., 1995. "Financial Policies and Economic Growth: Theory, Evidence and Country-Specific Experience from Sub-Saharan Africa," Papers 18s, African Economic Research Consortium.
  18. 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 231-71, October.
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