Capital inflows and exchange rate in LDCs: The Dutch disease problem revisited

In this paper, the link between capital inflows and real exchange rate movements in LDCs is revisited theoretically and empirically. On the theoretical side we present a simple model to show that the real exchange rate depends mainly on "real fundamentals" 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 real fundamentals are the main driving forces of real exchange rate move... Mehr ...