Capital flows and exchange rate volatility: experience of emerging economies

O. P. C. Muhammed Rafi () and M Ramachandran ()
Additional contact information
O. P. C. Muhammed Rafi: Pondicherry University
Authors registered in the RePEc Author Service: Muhammed Rafi OPC

Indian Economic Review, 2018, vol. 53, issue 1, No 8, 183-205

Abstract: Abstract In the recent past, there has been a significant rise in the cross-border capital flows and a large chunk of it is being attracted by emerging economies. This poses an important question, whether the capital flows, especially foreign portfolio flows, are responsible for the increasing volatility of exchange rate in emerging economies. This study is an attempt to answer this question. To this end, we estimated a Panel Vector Autoregression model using quarterly data of ten emerging economies for the period 1997Q1–2017Q1. The evidence from impulse response indicates that exchange rate volatility significantly increases in response to the shocks in portfolio capital flows than to shocks in foreign direct inflows. The forecast error variance decomposition also suggests that shocks to foreign portfolio investment flows exert significant impact on the exchange rate volatility. The foreign portfolio flows are responsible for more than 7% of the variations in exchange rate volatility, while current account balance, stock prices and interest rate together explain only around 4% of the variations in exchange rate volatility.

Keywords: Exchange rate volatility; Foreign Portfolio Investment; Panel VAR; Emerging economies (search for similar items in EconPapers)
JEL-codes: F31 F32 G15 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://link.springer.com/10.1007/s41775-018-0031-1 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:inecre:v:53:y:2018:i:1:d:10.1007_s41775-018-0031-1

Ordering information: This journal article can be ordered from
https://www.springer.com/economics/journal/41775

DOI: 10.1007/s41775-018-0031-1

Access Statistics for this article

Indian Economic Review is currently edited by Uday Bhanu Sinha, Abhijit Banerji, Shreekant Gupta and J.V. Meenakshi

More articles in Indian Economic Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().