The Impact of Capital and Foreign Exchange Flowson the Competitiveness of Developing Countries

Author/Editor:

Bassem M Kamar ; Damyana Bakardzhieva ; Sami Ben Naceur ; Sami Ben Naceur

Publication Date:

July 1, 2010

Electronic Access:

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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:

Attracting capital and foreign exchange flows is crucial for developing countries. Yet, these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness, jeopardizing exports and growth. This paper investigates this dilemma by comparing the impact of six types of capital and foreign exchange flows on real exchange rate behavior in a sample of 57 developing countries covering Africa, Europe, Asia, Latin America, and the Middle East. The results reveal that portfolio investments, foreign borrowing, aid, and income lead to real exchange rate appreciation, while remittances have disparate effects across regions. Foreign direct investments have no effect on the real exchange rate, contributing to resolve the above dilemma.

Series:

Working Paper No. 2010/154

Subject:

Balance of payments Capital flows Foreign direct investment Foreign exchange Portfolio investment Real effective exchange rates

English

Publication Date:

July 1, 2010

ISBN/ISSN:

9781455201372/1018-5941

Stock No:

WPIEA2010154

Pages:

30

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