Capital Inflows: Macroeconomic Implications and Policy Responses

Posted: 30 Jul 2011

See all articles by Roberto Cardarelli

Roberto Cardarelli

International Monetary Fund (IMF)

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

This paper examines the macroeconomic implications of and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes.

Keywords: Capital inflows, Sudden stops, Crises, Sterilization, Capital controls

JEL Classification: F30, F32, F34

Suggested Citation

Cardarelli, Roberto and Elekdag, Selim Ali and Kose, M. Ayhan, Capital Inflows: Macroeconomic Implications and Policy Responses (2010). Economic Systems, Vol. 34, No. 4, 2010, Available at SSRN: https://ssrn.com/abstract=1898939

Roberto Cardarelli

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

M. Ayhan Kose (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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