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American Economic Review Vol. 106 No. 5 2016

Capital Flows: Expansionary or Contractionary?

Olivier Blanchard1; Jonathan D. Ostry2; Atish R. Ghosh2; Marcos Chamon3

1 Peterson Institute for International Economics, 1750 Massachusetts Avenue NW, Washington, DC 20036 (e-mail: ) · 2 Research Department, International Monetary Fund, 700 19th Street NW, Washington, DC 20431 (e-mail: ) · 3 Research Department, International Monetary Fund, 700 19th Street NW, Washington, DC (e-mail: )

Abstract

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers, however, believe that inflows lead to credit booms and rising output; the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, stimulating financial intermediation and, potentially, output as well. We explore the implications, and find support for the key predictions in the data.

DOI
10.1257/aer.p20161012
Volume
106
Issue
5
Pages
565-569
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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