Capital Flows and the Real Economy
The effects of capital inflows on the real exchange rate and the growth of output, consumption and investment were explored using data from Iceland from the first quarter of 1997 to the last quarter of 2018. The objective was to explore whether capital inflows, caused by domestic interest rates bein...
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Online Access: | https://vbn.aau.dk/da/publications/5d1d8150-1ee3-48e9-980c-e2582e973c88 https://doi.org/10.1007/s11293-019-09605-w http://www.scopus.com/inward/record.url?scp=85062625615&partnerID=8YFLogxK https://link.springer.com/article/10.1007%2Fs11293-019-09605-w |
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ftalborgunivpubl:oai:pure.atira.dk:publications/5d1d8150-1ee3-48e9-980c-e2582e973c88 2024-05-12T08:05:55+00:00 Capital Flows and the Real Economy Raza, Hamid Zoega, Gylfi 2019-03 https://vbn.aau.dk/da/publications/5d1d8150-1ee3-48e9-980c-e2582e973c88 https://doi.org/10.1007/s11293-019-09605-w http://www.scopus.com/inward/record.url?scp=85062625615&partnerID=8YFLogxK https://link.springer.com/article/10.1007%2Fs11293-019-09605-w eng eng https://vbn.aau.dk/da/publications/5d1d8150-1ee3-48e9-980c-e2582e973c88 info:eu-repo/semantics/closedAccess Raza , H & Zoega , G 2019 , ' Capital Flows and the Real Economy ' , Atlantic Economic Journal , vol. 47 , no. 1 , pp. 13-23 . https://doi.org/10.1007/s11293-019-09605-w Demand compression F32 Real exchange rates Sudden stop article 2019 ftalborgunivpubl https://doi.org/10.1007/s11293-019-09605-w 2024-04-15T00:45:08Z The effects of capital inflows on the real exchange rate and the growth of output, consumption and investment were explored using data from Iceland from the first quarter of 1997 to the last quarter of 2018. The objective was to explore whether capital inflows, caused by domestic interest rates being higher than foreign interest rates, were expansionary indicating the presence of an international financial cycle in contrast to the predictions of the Mundell-Fleming model. The statistical analysis consisted of the estimation of a vector autoregression system, which is used to generate impulse response functions for the variables of interest. We found that an increase in the capital inflow into a currency area increased output, consumption and investment. It follows that higher domestic interest rates under free capital mobility can have an expansionary effect by encouraging capital inflows that cause real exchange rates to increase as well as output and private expenditures. These findings call for the use of two policy instruments in small, open economies. In addition to interest rates, there is a need for some restrictions on portfolio investments by foreign investors. The restrictions will weaken the exchange rate effects of changes in domestic and foreign interest rates, leaving the interest rate channel of monetary policy to respond to the real economy. Article in Journal/Newspaper Iceland Aalborg University's Research Portal Atlantic Economic Journal 47 1 13 23 |
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Open Polar |
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Aalborg University's Research Portal |
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ftalborgunivpubl |
language |
English |
topic |
Demand compression F32 Real exchange rates Sudden stop |
spellingShingle |
Demand compression F32 Real exchange rates Sudden stop Raza, Hamid Zoega, Gylfi Capital Flows and the Real Economy |
topic_facet |
Demand compression F32 Real exchange rates Sudden stop |
description |
The effects of capital inflows on the real exchange rate and the growth of output, consumption and investment were explored using data from Iceland from the first quarter of 1997 to the last quarter of 2018. The objective was to explore whether capital inflows, caused by domestic interest rates being higher than foreign interest rates, were expansionary indicating the presence of an international financial cycle in contrast to the predictions of the Mundell-Fleming model. The statistical analysis consisted of the estimation of a vector autoregression system, which is used to generate impulse response functions for the variables of interest. We found that an increase in the capital inflow into a currency area increased output, consumption and investment. It follows that higher domestic interest rates under free capital mobility can have an expansionary effect by encouraging capital inflows that cause real exchange rates to increase as well as output and private expenditures. These findings call for the use of two policy instruments in small, open economies. In addition to interest rates, there is a need for some restrictions on portfolio investments by foreign investors. The restrictions will weaken the exchange rate effects of changes in domestic and foreign interest rates, leaving the interest rate channel of monetary policy to respond to the real economy. |
format |
Article in Journal/Newspaper |
author |
Raza, Hamid Zoega, Gylfi |
author_facet |
Raza, Hamid Zoega, Gylfi |
author_sort |
Raza, Hamid |
title |
Capital Flows and the Real Economy |
title_short |
Capital Flows and the Real Economy |
title_full |
Capital Flows and the Real Economy |
title_fullStr |
Capital Flows and the Real Economy |
title_full_unstemmed |
Capital Flows and the Real Economy |
title_sort |
capital flows and the real economy |
publishDate |
2019 |
url |
https://vbn.aau.dk/da/publications/5d1d8150-1ee3-48e9-980c-e2582e973c88 https://doi.org/10.1007/s11293-019-09605-w http://www.scopus.com/inward/record.url?scp=85062625615&partnerID=8YFLogxK https://link.springer.com/article/10.1007%2Fs11293-019-09605-w |
genre |
Iceland |
genre_facet |
Iceland |
op_source |
Raza , H & Zoega , G 2019 , ' Capital Flows and the Real Economy ' , Atlantic Economic Journal , vol. 47 , no. 1 , pp. 13-23 . https://doi.org/10.1007/s11293-019-09605-w |
op_relation |
https://vbn.aau.dk/da/publications/5d1d8150-1ee3-48e9-980c-e2582e973c88 |
op_rights |
info:eu-repo/semantics/closedAccess |
op_doi |
https://doi.org/10.1007/s11293-019-09605-w |
container_title |
Atlantic Economic Journal |
container_volume |
47 |
container_issue |
1 |
container_start_page |
13 |
op_container_end_page |
23 |
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1798848312963497984 |