Foreign Capital Inflow and Real Exchange Rate Appreciation in Developing Economies: Theory and Empirical Evidence

Foreign direct investment specially targeted to export sector is relatively new phenomenon in the global economy. Such inflow of foreign capital changes the sectoral composition of the economy, and it has some influence on the exchange rate of the destination country. In this study, we attempt to provide underlying theoretical and empirical explanations for exchange rate appreciation due to foreign capital inflow. We first use an extended three-sector specific factor model to explain analytically why and how an inflow of foreign capital boosts the price of a nontradable good that helps tilting the exchange rate in favor of the host country and then conduct an empirical analysis based on a panel dataset of 12 prominent developing countries over the time period 1980–2011 to substantiate our theoretical findings. We also strive to look at the possible consequences on factor prices and on sectoral de-composition of a representative economy.

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Sector Specific Inflow of Foreign Capital, Non-Traded Sector and Implications for Real Exchange Rate

SSRN Electronic Journal ◽

10.2139/ssrn.3002477 ◽

2017 ◽

Author(s):

Biswajit Mandal ◽

Anindya Biswas ◽

Prasun Bhattacharjee

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Foreign Capital

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The Effect of Real Exchange Rate on Trade Balance in a Resource-Rich Economy: The Case of Mongolia

Foreign Trade Review ◽

10.1177/0015732518797184 ◽

2018 ◽

Vol 53 (4) ◽

pp. 211-224 ◽

Cited By ~ 2

Author(s):

Gan-Ochir Doojav

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Balance ◽

Developing Economies ◽

Jel Classification ◽

Vector Error Correction ◽

Vector Error ◽

Long Run ◽

Short Run ◽

Exchange Rate Depreciation

For resource-rich developing economies, the effect of real exchange rate depreciation on trade balance may differ from the standard findings depending on country specific characteristics. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, a resource-rich developing country. Empirical results show that exchange rate depreciation improves trade balance in both short and long run. In particular, the well-known Marshall–Lerner condition holds in the long run; however, there is no evidence of the classic J-curve effects in the short run. The results suggest that the exchange rate flexibility may help to deal effectively with current account deficits and exchange rate risk. JEL Classification: C32, C51, F14, F32

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The Impact of Real Exchange Rate Undervaluation on Economic Growth: Evidence from Panel Cointegration Approach

10.21203/rs.3.rs-16924/v1 ◽

2020 ◽

Author(s):

Mehdi Seraj ◽

Cagay Coskuner ◽

Seyi Saint Akadiri ◽

Negar Bahadori

Keyword(s):

Economic Growth ◽

Exchange Rate ◽

Real Exchange Rate ◽

Developing Economies ◽

Panel Cointegration ◽

Least Square ◽

Ordinary Least Square ◽

Developed Economies ◽

Periodic Data ◽

The Impact

Abstract This study revisited Dani Rodrik (2008) work on real exchange rate undervaluation and economic growth by using the Fully Modified Ordinary Least Square (FMOLS) and Dynamic Ordinary Least Square (DOLS). This research, to the best of authors' knowledge, is the first to use FMOLS and DOLS approach to empirically evaluate Rodrik work on the real exchange rate and economic growth using a Panel periodic data (six sets of five years) of 82 countries throughout 1990 to 2018. We used the Balassa Samuelson method to estimate the predicted real exchange rate and real exchange rate undervaluation. Finally, the study is in support of Rodrik conclusion that, real exchange undervaluation has a significant impact on the economic growth of the developing economies and statistically insignificant in the developed economies.

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The Nexus Among Trade Volume, Trade Deficit and Real Exchange Rate: An Empirical Evidence from Pakistan

10.7176/jesd/10-4-10 ◽

2019 ◽

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Empirical Evidence ◽

Trade Deficit ◽

Trade Volume

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Capital inflows, exchange rate and agricultural output in Nigeria

Future Business Journal ◽

10.1186/s43093-019-0001-9 ◽

2019 ◽

Vol 5 (1) ◽

Author(s):

Fredrick Ikpesu ◽

Abraham Emmanuel Okpe

Keyword(s):

Exchange Rate ◽

Foreign Capital ◽

Public Capital ◽

Capital Inflow ◽

Capital Inflows ◽

Private Capital ◽

Agricultural Output ◽

Long Run ◽

The Government ◽

Exchange Rate Depreciation

AbstractThe study applied the autoregressive distributed lag (ARDL) technique in investigating the effect of capital inflows and exchange rate on agricultural output in Nigeria between the periods 1981 and 2016. The technique was selected because the variables are integrated at both 1(1) and 1(0) and the sample size is considerably small. Variables used in the study are agricultural output (AO), private capital inflow (PRCI), public capital inflow (PUBCI), investment (INV), labor (L) and real effective exchange rate. Findings from the empirical research revealed that the variables are cointegrated. The research outcome also indicates that in the short run and long run, private capital inflow and public capital inflow positively affect the country agricultural output. The study also revealed that exchange rate depreciation would cause agricultural output to decline in the short and long run. Based on the research findings, it is recommended that the government should create an enabling and conducive environment to attract more inflows of foreign capital into the country to boost the agricultural output. Also, monetary authority should ensure the stability of the country’s exchange rate (Naira) since exchange rate depreciation affects agricultural output negatively. Furthermore, there is the need for the harmonization of foreign capital inflow policy and monetary policy by the government, taking into consideration the optimal level of capital inflow that will not have a detrimental effect on exchange rate so as to ensure sustainable growth in agricultural output.

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