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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| Published in | Review of development economics Vol. 15; no. 3; pp. 556 - 568 |
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| Main Author | |
| Format | Journal Article |
| Language | English |
| Published |
Oxford, UK
Blackwell Publishing Ltd
01.08.2011
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| Subjects | |
| Online Access | Get full text |
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| Abstract | 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. |
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| AbstractList | 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. Abstract 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. 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. [PUBLICATION ABSTRACT] |
| Author | Lartey, Emmanuel K. K. |
| Author_xml | – sequence: 1 givenname: Emmanuel K. K. surname: Lartey fullname: Lartey, Emmanuel K. K. email: elartey@fullerton.edu organization: Department of Economics, California State University, USA |
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| Cites_doi | 10.1016/j.jdeveco.2005.05.010 10.1016/j.jimonfin.2009.01.005 10.1111/j.1468-2362.2008.01222.x 10.2139/ssrn.1356448 10.2307/2297968 10.1016/S0304-4076(98)00009-8 10.1080/09638190701526667 10.1111/1467-9701.00539 10.2307/2232670 10.1111/j.1467-9396.2007.00727.x |
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| Notes | 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. |
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| References | Athukorala, Prema-chandra and Sarath Rajapatirana, "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy 26 (2003):613-37. Blundell, Richard and Stephen Bond, "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Journal of Econometrics 87 (1998):115-43. Williamson, John, "The Management of Capital Inflows," Pensamiento Iberoamericano no. 27 (1995). Lartey, Emmanuel K. K., "Capital Inflows, Resource Reallocation and the Real Exchange Rate," International Finance 11 (2008):131-52. Lartey, Emmanuel K. K., "Capital Inflows and the Real Exchange Rate: An Empirical Study of Sub-Saharan Africa," Journal of International Trade and Economic Development 16 (2007):337-57. Chinn, Menzie D. and Hiro Ito, "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Journal of Development Economics 61 (2006):163-92. Bussiere, Matthieu and Marcel Fratzscher, "Financial Openness and Growth: Short-run Gain, Long-run Pain?" Review of International Economics 16 (2008):69-95. Corden, W. Max and J. Peter Neary, "Booming Sector and De-industrialisation in a Small Open Economy," Economic Journal 92 (1982):825-48. Arellano, Manuel and Stephen Bond, "Some Tests of Specification for Panel Data: Monte Carlo Evidence with an Application for Employment Equations," Review of Economic Studies 58 (1991):277-97. Kose, M. Ayhan, Eswar S. Prasad and Marco E. Terrones, "Does Openness to International Financial Flows Raise Productivity Growth?" Journal of International Money and Finance 28 (2009):554-80. 2009 2008 2003; 26 2008; 11 1991; 58 2006; 61 1982; 92 1995; 27 1998; 87 2008; 16 2009; 28 2007; 16 e_1_2_6_9_1 e_1_2_6_8_1 Williamson John (e_1_2_6_12_1) 1995; 27 e_1_2_6_5_1 e_1_2_6_4_1 e_1_2_6_10_1 e_1_2_6_7_1 e_1_2_6_6_1 e_1_2_6_13_1 e_1_2_6_3_1 e_1_2_6_11_1 e_1_2_6_2_1 |
| References_xml | – volume: 92 start-page: 825 year: 1982 end-page: 48 article-title: “Booming Sector and De‐industrialisation in a Small Open Economy publication-title: Economic Journal – volume: 58 start-page: 277 year: 1991 end-page: 97 article-title: “Some Tests of Specification for Panel Data: Monte Carlo Evidence with an Application for Employment Equations publication-title: Review of Economic Studies – volume: 16 start-page: 337 year: 2007 end-page: 57 article-title: “Capital Inflows and the Real Exchange Rate: An Empirical Study of Sub‐Saharan Africa publication-title: Journal of International Trade and Economic Development – year: 2009 – volume: 26 start-page: 613 year: 2003 end-page: 37 article-title: “Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America publication-title: The World Economy – volume: 16 start-page: 69 year: 2008 end-page: 95 article-title: “Financial Openness and Growth: Short‐run Gain, Long‐run Pain?” publication-title: Review of International Economics – volume: 87 start-page: 115 year: 1998 end-page: 43 article-title: “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models publication-title: Journal of Econometrics – volume: 28 start-page: 554 year: 2009 end-page: 80 article-title: “Does Openness to International Financial Flows Raise Productivity Growth?” publication-title: Journal of International Money and Finance – volume: 11 start-page: 131 year: 2008 end-page: 52 article-title: “Capital Inflows, Resource Reallocation and the Real Exchange Rate publication-title: International Finance – year: 2008 – volume: 61 start-page: 163 year: 2006 end-page: 92 article-title: “What Matters for Financial Development? Capital Controls, Institutions, and Interactions publication-title: Journal of Development Economics – volume: 27 year: 1995 article-title: “The Management of Capital Inflows publication-title: Pensamiento Iberoamericano – ident: e_1_2_6_7_1 doi: 10.1016/j.jdeveco.2005.05.010 – ident: e_1_2_6_8_1 doi: 10.1016/j.jimonfin.2009.01.005 – ident: e_1_2_6_10_1 doi: 10.1111/j.1468-2362.2008.01222.x – ident: e_1_2_6_11_1 doi: 10.2139/ssrn.1356448 – ident: e_1_2_6_2_1 doi: 10.2307/2297968 – ident: e_1_2_6_4_1 doi: 10.1016/S0304-4076(98)00009-8 – ident: e_1_2_6_9_1 doi: 10.1080/09638190701526667 – volume: 27 year: 1995 ident: e_1_2_6_12_1 article-title: “The Management of Capital Inflows publication-title: Pensamiento Iberoamericano contributor: fullname: Williamson John – ident: e_1_2_6_3_1 doi: 10.1111/1467-9701.00539 – ident: e_1_2_6_6_1 doi: 10.2307/2232670 – ident: e_1_2_6_5_1 doi: 10.1111/j.1467-9396.2007.00727.x – ident: e_1_2_6_13_1 |
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| SubjectTerms | Capital movement Developing countries Development economics Disclosure Economic theory Foreign exchange rates Foreign investment LDCs Studies |
| Title | Financial Openness and the Dutch Disease |
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