The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
It has been well-established in the literature that portfolio inflows appreciate the real
effective exchange rate. However, the literature lacks a systematic empirical analysis of the
impact of portfolio inflows by institutional sector or borrower type. This paper fills this gap
by exploring the impact of the inflows of portfolio capital into three institutional sectors
(government, banks and corporates) on the real effective exchange rate. Using a large sample
of 73 countries, it shows that the effect of portfolio inflows on the real effective exchange
rate depends on the sector the investment flows in. The findings are robust to different
econometric methods, additional variables in the model, and various indicators of real
effective exchange rates.