Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence

By Pierre-Richard Agénor, Willy A Hoffmaister

December 1, 1996

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Pierre-Richard Agénor, and Willy A Hoffmaister. Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence, (USA: International Monetary Fund, 1996) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Balance of payments, Capital flows, Capital inflows, Consumption, External position, Foreign assets, Foreign exchange, National accounts, Real exchange rates

Keywords: Asia and Pacific, Capital flows, Capital inflows, Consumption, Consumption decision, Current account, Debtor country, Ex post interest rate differential, Exchange rate, Foreign assets, Government spending, Government spending-output ratio, Interest rate, Interest rate differential, Market-clearing interest rate, Money stock, Real exchange rates, Traded goods, Utility function, World interest rate, World interest rate shock, World interest rate variable, WP

Publication Details

Pages:

50
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1996/137
Stock No:

WPIEA1371996
ISBN:

9781451855876
ISSN:

1018-5941

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