Capital inflows and exchange rate in LDC: The Dutch disease problem revisited

Mouhamadou Sy and Hamid Reza Tabarraei

PSE Working Papers from PSE (Ecole normale supérieure)

Abstract: In this paper, the link between capital inflows and real exchange rate movements in LDC is revisited theoretically and empirically. Theoretically by representing a simple model to show that the real exchange rate depends mainly on real fundamentals as the term of trade or gross domestic product per capita and empirically by taking into account the heterogeneity of the sample, the dynamic of the RER and the non stationary nature of the data. Capital inflows can be the oil revenues, foreign aid or FDI. Empirically, it is also shown that these real fundamentals are the main driving forces of real exchange movements in these countries comparing to capital inflows. The TOT by itself account for 40% of the RER variations while capital inflows account only for 12% of RER variations. The Dutch disease theory is not rejected but its size on RER movements in LDC is not very big.

New Economics Papers: this item is included in nep-dev, nep-ifn and nep-opm
Date: 2009
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Persistent link: http://EconPapers.repec.org/RePEc:pse:psecon:2009-26

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