Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

By Olivier J Blanchard, Jonathan David Ostry, Atish R. Ghosh, Marcos d Chamon

October 23, 2015

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Olivier J Blanchard, Jonathan David Ostry, Atish R. Ghosh, and Marcos d Chamon. Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence, (USA: International Monetary Fund, 2015) accessed December 22, 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

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically, and find support for the key predictions in the data.

Subject: Balance of payments, Bonds, Capital controls, Capital inflows, Central bank policy rate, Exchange rates, Financial institutions, Financial services, Foreign exchange

Keywords: Bond flow, Bond inflow, Bonds, Capital controls, Capital inflows, Central bank, Central bank policy rate, Exchange rate, Exchange rate appreciation, Exchange rates, Foreign exchange intervention, FX intervention, Global, Inflows lead, Rate of return, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/226
Stock No:

WPIEA2015226
ISBN:

9781513500805
ISSN:

1018-5941

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