Title: Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited
Abstract: In this paper, the link between capital inflows and exchange rate movements in LDCs is revisited theoretically and empirically. On the theoretical side we present a simple model to show that the exchange rate depends mainly on real such as terms of trade or productivity differentials. Empirically, we take into account the heterogeneity of the sample, the dynamics of the RER and the non stationary nature of the data. Capital inflows can be oil revenues, foreign aid, remittances or FDI. We show that fundamentals are the main driving forces of exchange rate movements in LDCs and not capital inflows. The Balassa-Samuelson effect by itself accounts for 57% of the RER variations while capital inflows account only for 19% of RER variations. The Dutch Disease theory is not rejected but its effect on RER movements in LDCs is weak.
Publication Year: 2010
Publication Date: 2010-04-01
Language: en
Type: preprint
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Cited By Count: 12
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