Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America

25 Pages Posted: 13 Jul 2003

See all articles by Prema-chandra Athukorala

Prema-chandra Athukorala

Crawford School of Public Policy, Australian National University; Australian National University (ANU)

Sarath Rajapatirana

American Enterprise Institute (AEI)

Abstract

The nexus of real exchange rate (RER) and capital inflows is examined through a comparative analysis of the experiences of emerging market economies in Asian and Latin America during the period 1985-2000. It is found that the degree of appreciation in RER associated with capital inflow is uniformly much higher in Latin American countries compared to their Asian counterparts, despite the fact that the latter experienced far greater foreign capital inflows relative to the size of the economy. The econometric evidence suggests that both the composition of capital flows and differences in the degree of response of RER to capital flows matter in explaining these contrasting experiences. While RER appreciation is a phenomenon predominantly associated with other (non-FDI) forms of capital inflows (OCFW), a given level of OCFW brings about a far greater degree of appreciation of the real exchange rate in Latin America where the importance of these flows in total capital inflow is also far greater. On the policy front, Asian countries seem to have used fiscal contraction and nominal exchange rate adjustment more effectively to cushion the RER against the appreciation pressure of capital inflows. There is, however, no evidence to suggest that sterilised intervention can generate a lasting impact on the real exchange rate.

Suggested Citation

Athukorala, Prema-chandra and Rajapatirana, Sarath, Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America. The World Economy, Vol. 26, pp. 613-637, April 2003. Available at SSRN: https://ssrn.com/abstract=418958

Prema-chandra Athukorala (Contact Author)

Crawford School of Public Policy, Australian National University ( email )

Coombs Building (Blgd 9)
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 26125 8529 (Phone)
+61 26125 3700 (Fax)

HOME PAGE: http://rspas.anu.edu.au/economics/staff/athu/athu.htm

Australian National University (ANU)

Sarath Rajapatirana

American Enterprise Institute (AEI) ( email )

1150 17th Street, N.W.
Washington, DC 20036
United States

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