Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?

Author/Editor:

Christian Saborowski

Publication Date:

January 1, 2009

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:

This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector.

Series:

Working Paper No. 2009/020

Subject:

Balance of payments Capital inflows Financial markets Financial sector development Foreign direct investment Foreign exchange Real exchange rates Stock markets

English

Publication Date:

January 1, 2009

ISBN/ISSN:

9781451871678/1018-5941

Stock No:

WPIEA2009020

Pages:

42

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