Macroeconomic adjustment to capital inflows : Latin American style versus East Asian style
In recent years, private capital inflows to some developing countries have increased sharply. This increase has provided the financing needed to enhance the use of existing capacity and to raise investment levels. But capital inflows produce their own problems. They can increase inflation and lead to exchange rate appreciation, for example. The authors review the macroeconomic repercussions of an increase in capital inflows. Generally, it will result in appreciation of the real exchange rate, a larger nontradable sector, a smaller tradable sector, and a larger trade deficit. Under a fixed exchange rate regime, it will also result in faster inflation and an accumulation of foreign reserves. Can government intervention minimize the size and effects of real exchange rateappreciation? The authors discuss different mechanisms that can be used to limit the appreciation - and discuss the difference, in this respect, between portfolio investment and external debt. Finally, they review and compare the recent experiences of four Latin American countries (Argentina, Chile, Colombia, and Mexico) and five East Asian countries (Indonesia, Malaysia, the Philippines, the Republic of Korea, and Thailand), and discuss how these countries have dealt with the macroeconomic side effects of capital inflows. The authors found the following: All nine countries have avoided a permanent, significant increase in inflation, it can be argued. In Argentina and Mexico inflation has been decreasing for three or four years, and in the other seven countries it has remained stable. The countries that received the largest average capital inflows (as a proportion of GDP) in 1989-92 are not those that experienced the greatest exchange rate appreciation. In fact, the countries with the greatest capital inflows (Chile, Malaysia, and Thailand) have experienced either depreciation or low appreciation of their currencies. (Appreciation was lower in Thailand than in Korea despite much greater capital inflows in Thailand.) Countries with decreasing government consumption as a percentage of GDP (Chile, Indonesia, and Malaysia) showed less appreciation of the real exchange rate. Countries with increasing government consumption as a percentage of GDP (Argentina, Korea, Mexico, and the Philippines) showed the greatest appreciation of the real exchange rate, despite not receiving the greatest capital inflows.
|Date of creation:||30 Nov 1994|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November.
- Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992.
"Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors,"
IMF Working Papers
92/62, International Monetary Fund.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
- Calvo, Guillermo A & Rodriguez, Carlos Alfredo, 1977. "A Model of Exchange Rate Determination under Currency Substitution and Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 617-25, June.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994.
"The Capital Inflows Problem: Concepts And Issues,"
Contemporary Economic Policy,
Western Economic Association International, vol. 12(3), pages 54-66, 07.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1377. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.