Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate

Author/Editor:

Jean-Louis Combes ; Patrick Plane ; Tidiane Kinda

Publication Date:

January 1, 2011

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes the impact of capital inflows and exchange rate flexibility on the real exchange rate in developing countries based on panel cointegration techniques. The results show that public and private flows are associated with a real exchange rate appreciation. Among private flows, portfolio investment has the highest appreciation effect-almost seven times that of foreign direct investment or bank loans-and private transfers have the lowest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real exchange rate stemming from capital inflows.

Series:

Working Paper No. 2011/009

Subject:

Balance of payments Capital inflows Exchange rate arrangements Exchange rate flexibility Foreign exchange Real effective exchange rates Real exchange rates

English

Publication Date:

January 1, 2011

ISBN/ISSN:

9781455211876/1018-5941

Stock No:

WPIEA2011009

Pages:

34

Please address any questions about this title to publications@imf.org