 Capital Inflows, Resource Reallocation and the Real Exchange RateInternational Finance, 2008, vol. 11, issue 2, 131-152 Abstract: A large capital inflow to a developing economy can potentially cause a real exchange rate appreciation that is detrimental to the prospects of its tradable sector; a phenomenon known as the Dutch Disease. I analyse the effects of both the level and share of capital inflow on resource reallocation and real exchange rate movements in a small open economy. I find that there exists a trade‐off between resource reallocation and the degree of real exchange rate appreciation. In particular, the less labour the tradable sector loses to the non‐tradable sector, the greater is the real exchange rate appreciation. This result is driven by the share of investment accounted for by foreign capital, and suggests that an emerging market economy that adopts a production technique which utilizes a greater share of foreign capital relative to domestic capital will be more susceptible to the Dutch Disease following an increase in capital inflow. The results also imply that a policy designed to minimize real exchange rate appreciation during capital inflow episodes should encompass measures aimed at stabilizing prices of non‐tradables. Date: 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:intfin:v:11:y:2008:i:2:p:131-152 Ordering information: This journal article can be ordered from Access Statistics for this article International Finance is currently edited by Benn Steil More articles in International Finance from Wiley Blackwell |
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