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

Anindya Biswas, Biswajit Mandal and Nitesh Saha ()
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Anindya Biswas: Department of Business, Spring Hill College, 4000 Dauphin St., Mobile, AL 36608, USA
Nitesh Saha: GlaxoSmithKline, 5 Crescent Drive, Philadelphia, PA, 19112

Global Economy Journal (GEJ), 2014, vol. 14, issue 03n04, 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)
Date: 2014
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Journal Article: Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence (2014)
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DOI: 10.1515/GEJ-2014-0020

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