Do Capital Flows Reflect Economic Fundamentals in Developing Countries?

April 1, 1993

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Format: Chicago

Atish R. Ghosh, and Jonathan David Ostry. Do Capital Flows Reflect Economic Fundamentals in Developing Countries?, (USA: International Monetary Fund, 1993) accessed November 9, 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 proposes a methodology for testing whether capital flows to developing countries are determined by economic fundamentals or by purely speculative forces. We use the intertemporal optimizing approach to current account determination as our benchmark for judging the behavior of capital flows. According to this approach, capital flows should act as a buffer to smooth consumption in the face of temporary shocks to national cash flow, defined as output less investment less government expenditures. The results are encouraging. For a large sample of developing countries, economic fundamentals are indeed found to be the most important determinant of capital flows.

Subject: Balance of payments, Capital flows, Consumption, Consumption distribution, Currencies, Current account, Money, National accounts

Keywords: Africa, Benchmark current account series, Capital flows, Consumption, Consumption distribution, Currencies, Current account, Current account behavior, Current account determination, Current account movement, Middle East, National cash flow, Null hypothesis, Variance ratio, Western Hemisphere, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/034
Stock No:

WPIEA0341993
ISBN:

9781451978827
ISSN:

1018-5941

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