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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.

Suggested Citation

  • 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. Prema-Chandra Athukorala & Sisira Jayasuriya, 2003. "Food Safety Issues, Trade and WTO Rules: A Developing Country Perspective," The World Economy, Wiley Blackwell, vol. 26(9), pages 1395-1416, September.
    2. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, pages 115-135.
    3. Otsuki, Tsunehiro*Wilson,John S.*Sewadeh, Mirvat, 2001. "A race to the top? A case study of food safety standards and African exports," Policy Research Working Paper Series 2563, The World Bank.
    4. Athukorala, Prema-chandra & Sen, Kunal, 1998. "Processed food exports from developing countries: patterns and determinants," Food Policy, Elsevier, vol. 23(1), pages 41-54, February.
    5. Regmi, Anita & Gehlhar, Mark J. & Wainio, John & Vollrath, Thomas L. & Johnston, Paul V. & Kathuria, Nitin, 2005. "Market Access For High-Value Foods," Agricultural Economics Reports 33999, United States Department of Agriculture, Economic Research Service.
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    Cited by:

    1. Kodongo, Odongo & Ojah, Kalu, 2012. "The dynamic relation between foreign exchange rates and international portfolio flows: Evidence from Africa's capital markets," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 71-87.
    2. Tillmann, Peter, 2013. "Capital inflows and asset prices: Evidence from emerging Asia," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 717-729.
    3. Kodongo, Odongo & Ojah, Kalu, 2013. "Real exchange rates, trade balance and capital flows in Africa," Journal of Economics and Business, Elsevier, vol. 66(C), pages 22-46.
    4. repec:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500101 is not listed on IDEAS
    5. Abdul Jalil Khan & Parvez Azim & Shabib Haider Syed, 2014. "The Impact of Exchange Rate Volatility on Trade: A Panel Study on Pakistan’s Trading Partners," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 31-66, Jan-June.

    More about this item

    Keywords

    Capital mobility; real exchange rate; emerging Asian countries; FDI; foreign direct investment;

    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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