Capital Inflows and the Real Exchange Rate: Analytical Framework and Econometric Evidence

Pierre-Richard Agénor and Alexander Hoffmaister

No 1996/137, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the links between capital inflows and the real exchange rate under pegged exchange rates. The analytical framework is described, and a near-VAR model linking capital inflows, interest rate differentials, government spending, money base velocity, and the temporary component of the real exchange rate (TCRER) is estimated for Korea, Mexico, the Philippines, and Thailand. TCRER movements are associated only weakly with shocks to capital flows. Negative shocks to U.S. interest rates lead to capital inflows in Asia and a TCRER appreciation in the Philippines and Thailand. Positive shocks to government spending have a small but statistically significant effect on the TCRER for Korea.

Keywords: WP; interest rate; exchange rate; current account; government spending; world interest rate; interest rate differential; money stock; world interest rate variable; utility function; government spending-output ratio; world interest rate shock; traded goods; market-clearing interest rate; debtor country; ex post interest rate differential; consumption decision; Real exchange rates; Capital inflows; Foreign assets; Consumption; Capital flows; Asia and Pacific (search for similar items in EconPapers)
Pages: 50
Date: 1996-12-01
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Citations: View citations in EconPapers (5)

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Journal Article: Capital inflows and the real exchange rate: analytical framework and econometric evidence (1996)
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