Do Capital Flows Reflect Economic Fundamentals in Developing Countries?

Author/Editor:

Atish R. Ghosh ; Jonathan David Ostry

Publication Date:

April 1, 1993

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 proposes a methodology for testing whether capital flows to developing countries are determined by economic fundamentals or by purely speculative forces. We use the intertemporal optimizing approach to current account determination as our benchmark for judging the behavior of capital flows. According to this approach, capital flows should act as a buffer to smooth consumption in the face of temporary shocks to national cash flow, defined as output less investment less government expenditures. The results are encouraging. For a large sample of developing countries, economic fundamentals are indeed found to be the most important determinant of capital flows.

Series:

Working Paper No. 93/34

English

Publication Date:

April 1, 1993

ISBN/ISSN:

9781451978827/1018-5941

Stock No:

WPIEA0341993

Format:

Paper

Pages:

46

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