Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence
Summary:
This paper examines the links between capital inflows and the real exchange rate under pegged exchange rates. The analytical framework is described, and a near-VAR model linking capital inflows, interest rate differentials, government spending, money base velocity, and the temporary component of the real exchange rate (TCRER) is estimated for Korea, Mexico, the Philippines, and Thailand. TCRER movements are associated only weakly with shocks to capital flows. Negative shocks to U.S. interest rates lead to capital inflows in Asia and a TCRER appreciation in the Philippines and Thailand. Positive shocks to government spending have a small but statistically significant effect on the TCRER for Korea.
Series:
Working Paper No. 1996/137
Subject:
Balance of payments Capital flows Capital inflows Consumption External position Foreign assets Foreign exchange National accounts Real exchange rates
English
Publication Date:
December 1, 1996
ISBN/ISSN:
9781451855876/1018-5941
Stock No:
WPIEA1371996
Pages:
50
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