Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence

Anindya Biswas, Biswajit Mandal and Saha Nitesh ()
Additional contact information
Saha Nitesh: GlaxoSmithKline, 5 Crescent Drive, Philadelphia, PA, 19112

Global Economy Journal, 2014, vol. 14, issue 3-4, 453-465

Abstract: Foreign direct investment specially targeted to export sector is relatively new phenomenon in the global economy. Such inflow of foreign capital changes the sectoral composition of the economy, and it has some influence on the exchange rate of the destination country. In this study, we attempt to provide underlying theoretical and empirical explanations for exchange rate appreciation due to foreign capital inflow. We first use an extended three-sector specific factor model to explain analytically why and how an inflow of foreign capital boosts the price of a nontradable good that helps tilting the exchange rate in favor of the host country and then conduct an empirical analysis based on a panel dataset of 12 prominent developing countries over the time period 1980–2011 to substantiate our theoretical findings. We also strive to look at the possible consequences on factor prices and on sectoral de-composition of a representative economy.

Keywords: foreign capital inflow; real effective exchange rate; international trade; developing economies; traded and nontraded goods (search for similar items in EconPapers)
JEL-codes: F21 F31 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1515/gej-2014-0020 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Journal Article: Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence (2014)
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:bpj:glecon:v:14:y:2014:i:3-4:p:13:n:5

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/gej/html

DOI: 10.1515/gej-2014-0020

Access Statistics for this article

Global Economy Journal is currently edited by Jannett Highfill

More articles in Global Economy Journal from De Gruyter
Bibliographic data for series maintained by Peter Golla ().