Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors

IMF Working Papers, August 1, 1992

Source details

Canonical URL: Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors

Authors: Leonardo Leiderman, Carmen Reinhart, Guillermo Calvo
Date: August 1, 1992
Core argument:
- The characteristics of recent capital inflows into Latin America are discussed.
- These inflows are partly explained by conditions outside the region, like recession in the United States and lower international interest rates.
- A reversal of those external conditions may lead to a future capital outflow, increasing the macroeconomic vulnerability of Latin American economies.
- Policy options are argued to be limited.

External drivers of capital inflows:
- Recession in the United States.
- Lower international interest rates.
Macroeconomic implications:
- Capital inflows have contributed to real exchange rate appreciation in Latin America.
- There is a risk that reversal of external conditions could produce capital outflows and elevated macroeconomic vulnerability.
Policy assessment:
- Policy options to counteract these vulnerabilities are described as limited.

Subject: Balance of payments, Capital account, Capital inflows, Capital outflows, Central banks, Foreign exchange, International reserves, Real exchange rates
Keywords: appreciation in Latin America, balance of payments, Capital account, capital gain, Capital inflows, Capital outflows, central bank, episode of reserves accumulation, external shock, forecast error variance, interest rate differential, International reserves, nominal exchange rate, Real exchange rates, reserves index, secondary market, terms of trade, Western Hemisphere, WP