Capital Inflows, Inflation and Exchange Rate Volatility: An Investigation for Linear and Nonlinear Causal Linkages

Abdul Rashid () and Fazal Husain

Macroeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: Since the early 1990s, there is an upsurge in foreign capital flows to developing economies, particularly into emerging markets. One view argues that capital inflows do help to increase efficiency, a better allocation of capital and to fill up the investment-saving gap. Adherents to that view advise countries to launch capital account liberalisation. In this study, we investigate the effects of capital inflows on domestic price level, monetary expansion and exchange rate volatility. To proceed with this, linear and nonlinear cointegration and Granger causality tests are applied in a bi-variate as well as in multivariate framework. The key message of the analysis is that there is a significant inflationary impact of capital inflows, in particular during the last 7 years. The finding suggest that there is a need to manage the capital inflows in such a way that they should neither create an inflationary pressure in the economy nor fuel the exchange rate volatility.

Keywords: Capital Inflows; Inflationary Pressures; exchange rate volatility; Monetary Expansion; Nonlinear Dynamics (search for similar items in EconPapers)
JEL-codes: C22 C32 F21 F31 F32 (search for similar items in EconPapers)
Date: 2010-01
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Capital Inflows, Inflation, and the Exchange Rate Volatility- An Investigation for Linear and Nonlinear Causal Linkages (2013)
Working Paper: Capital Inflows, Inflation and Exchange Rate Volatility: An Investigation for Linear and Nonlinear Causal Linkages (2010)
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