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Capital Inflows: Macroeconomic Implications and Policy Responses

Author/Editor: Cardarelli, Roberto | Elekdag, Selim | Kose, M. Ayhan
Authorized for Distribution: March 1, 2009
Electronic Access: Free Full Text (PDF file size is 838KB)
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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 examines the macroeconomic implications of, and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes.
 
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Series: Working Paper No. 09/40
Subject(s): Capital inflows | Emerging markets | Current account deficits | Exchange rate policy | Fiscal policy | Capital controls | Cross country analysis
Author's keyword(s): Capital inflows | sudden stops | crises | sterilization | capital controls
 
English  
    Published:   March 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009040   Pages:   60
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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