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Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence
Author:
Mr. Olivier J Blanchard
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,
Mr. Jonathan David Ostry
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Mr. Atish R. Ghosh
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Mr. Marcos d Chamon
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Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 226
Language:
English
Publication Date:
23 Oct 2015
DOI:
https://doi.org/10.5089/9781513500805.001
ISBN:
9781513500805
ISSN:
1018-5941
Pages:
24
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
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund