Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the Dutch Disease?

Christian Saborowski
2009 IMF Working Papers  
This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows.
more » ... ing dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector. JEL Classification Numbers: C33, E44, F31, F32
doi:10.5089/9781451871678.001 fatcat:hjbabzlolza4ddwd6oiknm7pza