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Capital Flows and Real Exchange Rates in Emerging Asian Countries

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Abstract

This paper examines the nexus between capital flows and real exchange rate (RER) in emerging Asian countries using a dynamic panel-data model for 2000–2009. In contrast to previous studies, capital flows here are separated into foreign direct investment (FDI), portfolio investment, and other investment (bank loans) flows. Inflows and outflows are also treated separately in the model. The estimation results show that compositions of capital flows matter in determining impacts of the flows on the RER. Portfolio investment and other investment (including bank loans) bring in a faster RER appreciation than FDI. However, the magnitudes of appreciation among capital flows are close to each other. The increasing importance of merger and acquisition activities in FDI makes the flows behave closer to other forms of capital flows, especially portfolio investment. The estimation results also show that capital outflows bring about a greater degree of exchange rate adjustment than capital inflows. All in all, the results imply that the swift rebound of capital flows in the region could result in excessive appreciation of the (real) currencies, especially when capital flows are in a form of portfolio investment and bank loans.

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  • Jongwanich, Juthathip, 2010. "Capital Flows and Real Exchange Rates in Emerging Asian Countries," ADB Economics Working Paper Series 210, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0210
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    1. Juthathip Jongwanich, 2010. "Determinants of Export Performance in East and Southeast Asia," The World Economy, Wiley Blackwell, vol. 33(1), pages 20-41, January.
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    5. Archanun Kohpaiboon, 2003. "Foreign trade regimes and the FDI-Growth Nexus: a case study of Thailand," Journal of Development Studies, Taylor & Francis Journals, vol. 40(2), pages 55-69.
    6. Juthathip Jongwanich, 2008. "Real exchange rate overvaluation and currency crisis: evidence from Thailand," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 373-382.
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    More about this item

    Keywords

    Capital mobility; real exchange rate; emerging Asian countries; FDI; foreign direct investment;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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