Financial Development and Capital Flows: The Effect on the Real Exchange Rate
Keywords:
financial development, capital flows, real exchange effective rates, panel co-integration, non-stationary heterogeneous panels, pooled meam-group esti
Abstract
The object of this paper is to determine the role played by the financial development in the effect of capital flows on real effective exchange rates. Our object is based on the idea that a developed financial market allows a better allocation of resources. Using the methodology of dynamic panel co-integration for 38 developed and developing countries covering the period 1989-2011, the results show that in the long run the development of the financial sector can weaken the appreciation effect of capital flows on real effective exchange rates. Through the calculation of the threshold value, we can conclude that from a certain threshold of the indicators of financial development the capital flows can have a real depreciation effect on exchange rates.
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2013-03-06
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