Reinhart, Carmen and Asea, Patrick (1995): Real interest rate differentials and the real exchange rate: Evidence from four African countries.
Download (1MB) | Preview
During the early 1990s much has been written about the return of foreign private capital to many of the larger Asian and Latin American countries. However, until 1992 there was little evidence that countries in sub-Saharan Africa were participating in this phenomenon. In this paper we use variance decompositions and impulse responses from vector autoregressions to shed light on the possible causes and consequences of capital inflows to four countries: Ghana, Kenya, Uganda, and Zimbabwe. We use trend-cycle decompositions to provide evidence linking the appreciation of the real exchange rate to periods of heavy capital inflows. We show that domestic real interest rates have played an important role in explaining the recent behavior of the real exchange rate. In particular, we trace the rise in domestic nominal and real interest rates to policies designed to liberalize the domestic financial sector and attempts to curb the monetary expansion associated with the capital inflows through sterilized intervention.
|Item Type:||MPRA Paper|
|Original Title:||Real interest rate differentials and the real exchange rate: Evidence from four African countries|
|Keywords:||capital flows real exchange rate interest rates|
|Subjects:||F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements
F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Carmen Reinhart|
|Date Deposited:||13 Feb 2009 00:49|
|Last Modified:||15 Jun 2016 12:05|
Asea, P. and E. Mendoza, "The Balassa-Samuelson Model: A General Equilibrium Appraisal," Review .of International Economics 2, (1994), 244-67.
Baxter, M., "Real Exchange Rates and Real Interest Differentials: Have We Missed the Businesscycle Relationship?," Jourlllal of Monetarv Economics 33, (1994) ..
Bennanke, B.S., "Alternative Explanations of the Money-Income Correlation,"Carnegie-Rochester Conference Series on Public Policies 2, (1986), 49-100.
Beveridge, S., and C. Nelson, "A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to the Measurement of the Business Cycle," Jourlllal .of Monetarv Economics 7, (1981), 151-74.
Blanchard, O.J., "A Traditional Interpretation of Macroeconomic Fluctuations," American Economic Review 79, (1989), 1146-64.
Calvo, G., L. Leiderman, and C.M. Reinhart, "Capital Inflows to Latin America: The Role of External Factors," IMF Staff Papers 40, (1993),108-51.
Calvo, G., "The Capital Inflows Problem: Concepts and Issues," Contemporarv Economic Policy 12, (1994), 54-66.
Calvo, G. "Inflows of Capital to Developing Countries in the 1990s: Causes and Effects," forthcoming in Joyrmal .of Economic Perspectives (1995).
Calvo, G., C.M. Reinhart, and C.A. Vegh, "Targeting the Real Exchange Rate: Theory and Evidence," forthcoming in Joyrmal .of Development Economics (1995).
Cochrane, J.H., "How Big is the Random Walk in GNP?, Jourmal .of Political Economv, 96, (1988)" 893-920.
Cuddington, J.T., "Commodity Export Booms in Developing Countries," Research Observer 4, (1989)" 143-65.
-' and L.A. Winters, "The Beveridge-Nelson Decomposition of Economic Time Series: A Quick Computational Method," Joyrmal of Monetarv Economics 19, (1987), 125-27.
Diaz Alejandro, C.F., "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings papers.oo EConomic Activitv ,2, (1984), 335-89.
Edwards, S., Real Exchange Rates Devaluation and Adjustment (Cambridge, Massachusetts: MIT Press, 1989) . . Elbadawi, I., and R. Soto, "Capital Flows and Long-term Equilibrium Real Exchange Rates in Chile," mimeo, The World Bank, November (1994).
Galbis, V., "High Real Interest Rates Under Financial Liberalization, Is There a Problem?," IMF Working Paper WP/9317, January (1993).
Ghura, D., and T.J. Grennes, "The Real Exchange Rate and Macroeconomic Performance in Sub- Saharan Africa," .Journal at Deyelopmegt Ecogomjcs 42, (1993), 155-74.
Glick, R, and R Moreno, "Capital Flows and Monetary Policy in East Asia," mimeo, Federal Reserve Bank of San Francisco, September (1994).
Hadjimichael, M.T., D. Ghura, M. Muhleisen, R Nord, and E.M. Uc;:er,"Sub-Saharan Africa: Growth, Savings, and Investment, 1986-93," IMF Occasional Paper 118, (Washington: International Monetary Fund, 1995).
Harvey, A.C., "Trends and Cycles in Macroeconomic Series," Joyrnal at Bysjness and Economjc Statjstjcs 3, (1985)" 216-27.
Kiguel, M., and L. Leiderman, "On the Consequences of Sterilized Intervention in Latin America: the Case of Colombia and Chile," mimeo, Tel Aviv University, (1994).
Lizondo, J.S., "Real Exchange Rate Targets, Nominal Exchange Rate Policies, and Inflation," Reyjsta de Analisjs Ecgg6mjco 6, (1991), 5-22.
-' "Real Exchange Rate Targeting Under Imperfect Asset Substitutability," IME Staff papers 40, (1993)" 829-51.
Lutkepohl, H., "Comparison of Criteria for Estimating the Order of a Vector Autoregressive Process," .Journal ,pf Tjme Serjes Agaly~ 6, (1985), 35-52.
Miller, S., "The Beveridge-Nelson Decomposition of Economic Time Series: Another Economical Computational Method, .Jpurnal ,pf Monetary Ecggomjc§ 21, (1988),141-142.
Montiel, P.J., "Financial Policies and Economic Growth: Theory, Evidence,and Country-Specific Experience from Sub-Saharan Africa," mimeo, Oberlin College, May (1994).
-' and J. Ostry, "Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries, IMF Staff Papers 38, (1991), 872-900.
-' "Real Exchange Rate Targeting Under Capital Controls: Can Money Provide a Nominal Anchor?, !ME Sfa.ff. ~ 39, (1992), 58-78.
Reinhart, C.M., and S. Dunaway, "Dealing with Capital Flows: Are There Any Lessons?," forthcoming IMF Working Paper, (1995).
Reinhart, C. and P. Wickham, "Commodity Prices: Cyclical Weakness or Secular Decline?," IMF Staff Papers 41, (1994), 175-213.
Rodriguez, C., "Situacion Monetaria y Cambiaria en Colombia," (unpublished manuscript; Buenos Aires, Argentina: CEMA, November 1991).
Sharer, RL., H.R De Zoysa, and C.A. Mc Donald, .ugagda- Adjustment wjth Growth 1987-94 IMF Occasional Paper 121, (Washington: International Monetary Fund, 1995).