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

By Jean-Louis Combes, Patrick Plane, Tidiane Kinda

January 1, 2011

Preview Citation

Format: Chicago

Jean-Louis Combes, Patrick Plane, and Tidiane Kinda. Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate, (USA: International Monetary Fund, 2011) accessed October 6, 2024

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.

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

Keywords: Appreciation effect, Appreciation of the real effective exchange rate, Asia and Pacific, Capital inflows, Dependent variable, Emerging markets, Exchange rate arrangements, Exchange rate determination model, Exchange rate flexibility, Exchange rate flexibility variable, Exchange rate regime choice, Exchange rate system, Exchange rate volatility, FDI flow, Global, Income effect, Index of exchange rate flexibility, Low-income countries, Nominal exchange rate, Pooled mean group estimator, Private capital flows, Real effective exchange rates, Real exchange rate, Real exchange rates, REER appreciation, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/009
Stock No:

WPIEA2011009
ISBN:

9781455211876
ISSN:

1018-5941

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