Financial Openness and the Dutch Disease

This paper studies the relationship between the degree of financial openness and Dutch disease effects of capital inflows in developing countries. The results reveal that an increase in financial openness leads to an appreciation of the real exchange rate. In particular, the study shows that an incr...

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Bibliographic Details
Published inReview of development economics Vol. 15; no. 3; pp. 556 - 568
Main Author Lartey, Emmanuel K. K.
Format Journal Article
LanguageEnglish
Published Oxford, UK Blackwell Publishing Ltd 01.08.2011
Subjects
Capital movement
Developing countries
Development economics
Disclosure
Economic theory
Foreign exchange rates
Foreign investment
LDCs
Studies
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Summary:This paper studies the relationship between the degree of financial openness and Dutch disease effects of capital inflows in developing countries. The results reveal that an increase in financial openness leads to an appreciation of the real exchange rate. In particular, the study shows that an increase in inflow of foreign direct investments (FDI) results in an appreciation of the real exchange rate in more financially open countries only. The results also suggest that there is a trade‐off between the resource movement effect and the spending effect in more financially open economies following an increase in FDI inflows, such that the more the tradable sector expands relative to the nontradable sector, the greater is the real exchange rate appreciation.
Bibliography:istex:41B45F9BCE9E3CD7DD7C237EE0BE26118AECBD9B
ArticleID:RODE627
ark:/67375/WNG-V6FJSDCC-V
The author is grateful to anonymous referees and seminar participants at California State University–Fullerton and SWEA meeting for excellent suggestions. The author is responsible for all errors.
ISSN:1363-6669
1467-9361
DOI:10.1111/j.1467-9361.2011.00627.x