Capital Inflows: Macroeconomic Implications and Policy Responses

By Selim A Elekdag, Ayhan Kose, Roberto Cardarelli

March 1, 2009

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Format: Chicago

Selim A Elekdag, Ayhan Kose, and Roberto Cardarelli. Capital Inflows: Macroeconomic Implications and Policy Responses, (USA: International Monetary Fund, 2009) 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

This paper examines the macroeconomic implications of, and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes.

Subject: Balance of payments, Capital controls, Capital inflows, Central banks, Currency markets, Exchange rates, Financial markets, Foreign exchange, Sterilization

Keywords: Africa, Asia and Pacific, Capital control, Capital controls, Capital inflows, Control measure, Crises, Currency markets, Current account, Europe, Exchange rate appreciation, Exchange rates, Global, Net capital, Nominal exchange rate, Sterilization, Sudden stops, WP

Publication Details

Pages:

62
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/040
Stock No:

WPIEA2009040
ISBN:

9781451871883
ISSN:

1018-5941

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