Real interest rate differentials and the real exchange rate: Evidence from four African countries

Carmen Reinhart and Patrick Asea

MPRA Paper from University Library of Munich, Germany

Abstract: During the early 1990s much has been written about the return of foreign private capital to many of the larger Asian and Latin American countries. However, until 1992 there was little evidence that countries in sub-Saharan Africa were participating in this phenomenon. In this paper we use variance decompositions and impulse responses from vector autoregressions to shed light on the possible causes and consequences of capital inflows to four countries: Ghana, Kenya, Uganda, and Zimbabwe. We use trend-cycle decompositions to provide evidence linking the appreciation of the real exchange rate to periods of heavy capital inflows. We show that domestic real interest rates have played an important role in explaining the recent behavior of the real exchange rate. In particular, we trace the rise in domestic nominal and real interest rates to policies designed to liberalize the domestic financial sector and attempts to curb the monetary expansion associated with the capital inflows through sterilized intervention.

Keywords: capital; flows; real; exchange; rate; interest; rates (search for similar items in EconPapers)
JEL-codes: F21 F31 F32 (search for similar items in EconPapers)
Date: 1995
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/13357/1/MPRA_paper_13357.pdf original version (application/pdf)

Related works:
Journal Article: Economic Growth and Economic Consequences of External Shocks in Sub-Saharan Africa: Introduction (1996)
Journal Article: Le Prix de l'Argent: How (Not) to Deal with Capital Inflows (1996)
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:pra:mprapa:13357

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().