Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

Olivier Blanchard, Jonathan Ostry, Atish Ghosh () and Marcos Chamon ()

No 2015/226, IMF Working Papers from International Monetary Fund

Abstract: The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers however believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically, and find support for the key predictions in the data.

Keywords: WP; bond flow; exchange rate; central bank; rate of return; capital inflows; capital controls; foreign exchange intervention; bond inflow; inflows lead; FX intervention; exchange rate appreciation; Central bank policy rate; Bonds; Exchange rates; Global (search for similar items in EconPapers)
Pages: 24
Date: 2015-10-23
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Citations: View citations in EconPapers (94)

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Related works:
Journal Article: Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence (2017)
Working Paper: Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence (2015)
Working Paper: Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence (2015)
Working Paper: Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence (2015)
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