Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

32 Pages Posted: 10 Nov 2015 Last revised: 19 Feb 2018

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Jonathan D. Ostry

International Monetary Fund (IMF)

Atish R. Ghosh

International Monetary Fund (IMF) - Policy Development and Review Department

Marcos Chamon

International Monetary Fund (IMF) - Research Department

Multiple version iconThere are 4 versions of this paper

Date Written: November 1, 2015

Abstract

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging-market policymakers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically and find support for the key predictions in the data.

Keywords: capital inflows, capital controls, foreign exchange intervention

JEL Classification: F21, F23

Suggested Citation

Blanchard, Olivier J. and Ostry, Jonathan D. and Ghosh, Atish R. and Chamon, Marcos, Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence (November 1, 2015). Peterson Institute for International Economics Working Paper No. 15-17. Available at SSRN: https://ssrn.com/abstract=2688061 or http://dx.doi.org/10.2139/ssrn.2688061

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Atish R. Ghosh

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Marcos Chamon

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-5867 (Phone)

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