Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?
January 1, 2009
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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.
Subject: Balance of payments, Capital inflows, Financial markets, Financial sector development, Foreign direct investment, Foreign exchange, Real exchange rates, Stock markets
Keywords: appreciation effect, Asia and Pacific, Capital Inflows, Dynamic Panel Data Models, East Africa, economic development, effect of capital inflows, FDI inflow, Financial Market Development, Financial sector development, Foreign direct investment, real exchange rate, Real exchange rates, Stock markets, variables FDI, WP
Pages:
42
Volume:
2009
DOI:
Issue:
020
Series:
Working Paper No. 2009/020
Stock No:
WPIEA2009020
ISBN:
9781451871678
ISSN:
1018-5941
