IDEAS home Printed from https://ideas.repec.org/a/kap/atlecj/v45y2017i4d10.1007_s11293-017-9549-3.html
   My bibliography  Save this article

Foreign Capital Flows, Uncertainties of Exchange Rates and Central Bank Independence: Implications for Emerging Economies

Author

Listed:
  • Hermann Sintim-Aboagye

    (Montclair State University)

  • Chandana Chakraborty

    (Montclair State University)

  • Serapio Byekwaso

    (I IMS Drive)

Abstract

Utilizing time series data for a panel of 22 emerging countries and applying Granger causality tests, this paper extends the relationship between central bank independence (CBI) and uncertainties of inflation by including the phenomena of exchange rates and foreign capital flows. There are two specific objectives of this investigation. The first objective is to see whether uncertainty of inflation induces volatility of exchange rates, and vice versa, under differing degrees of CBI. The second objective is to explore whether the dynamics of the former relationship influence foreign capital flows in turn and, if so, whether the extent of CBI plays any role in shaping that influence. The period of study spans the years 1968 through 2013. Conditional variances for inflation and exchange rates define proxies for uncertainties of inflation and exchange rates in the empirical analysis. Additionally, annual inflows of foreign direct investment (FDI) provide measures for foreign capital flows in the analysis. Results of causality tests for high and low CBI country subgroups show interesting differences. For the high CBI countries, uncertainty of inflation and uncertainty of exchange rates do not share any causal relationship whatsoever between them. However, a weak link runs from FDI to uncertainties of inflation in the long run. This may be indicative of the disciplined monetary policy and tamed inflation in these countries. Contrastingly, for the low CBI countries, there is strong evidence of causal links running from uncertainties of inflation to uncertainties of exchange rates on the one hand and to FDI flows on the other. In addition, there is indication of a bi-directional causal link between FDI flows and exchange rates for these countries.

Suggested Citation

  • Hermann Sintim-Aboagye & Chandana Chakraborty & Serapio Byekwaso, 2017. "Foreign Capital Flows, Uncertainties of Exchange Rates and Central Bank Independence: Implications for Emerging Economies," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 45(4), pages 485-496, December.
    • Handle: RePEc:kap:atlecj:v:45:y:2017:i:4:d:10.1007_s11293-017-9549-3
    DOI: 10.1007/s11293-017-9549-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11293-017-9549-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11293-017-9549-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    2. Caporale, Tony & Doroodian, Khosrow, 1994. "Exchange rate variability and the flow of international trade," Economics Letters, Elsevier, vol. 46(1), pages 49-54, September.
    3. Klein, Michael W. & Rosengren, Eric, 1994. "The real exchange rate and foreign direct investment in the United States : Relative wealth vs. relative wage effects," Journal of International Economics, Elsevier, vol. 36(3-4), pages 373-389, May.
    4. Bettina Becker & Stephen Hall, 2009. "Foreign Direct Investment in R&D and Exchange Rate Uncertainty," Open Economies Review, Springer, vol. 20(2), pages 207-223, April.
    5. Bruce A. Blonigen, 2019. "Firm-Specific Assets and the Link Between Exchange Rates and Foreign Direct Investment," World Scientific Book Chapters, in: Foreign Direct Investment, chapter 3, pages 89-120, World Scientific Publishing Co. Pte. Ltd..
    6. Nikolina Kosteletou & Panagiotis Liargovas, 2000. "Foreign Direct Investment and Real Exchange Rate Interlinkages," Open Economies Review, Springer, vol. 11(2), pages 135-148, April.
    7. Cukierman Alex, 1992. "CENTRAL BANK STRATEGY, CREDIBILITY, AND INDEPENDANCE: THEORY AND EVIDENCE: Compte Rendu par Dominique Cariofillo," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 581-590, December.
    8. Thornton, John, 2008. "Inflation and inflation uncertainty in Argentina, 1810-2005," Economics Letters, Elsevier, vol. 98(3), pages 247-252, March.
    9. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-873, November.
    10. S. Fountas & A. Ioannidis & M. Karanasos, 2004. "Inflation, Inflation Uncertainty and a Common European Monetary Policy," Manchester School, University of Manchester, vol. 72(2), pages 221-242, March.
    11. Crowe, Christopher & Meade, Ellen E., 2008. "Central bank independence and transparency: Evolution and effectiveness," European Journal of Political Economy, Elsevier, vol. 24(4), pages 763-777, December.
    12. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    13. Philip R. Lane, 1999. "What Determines the Nominal Exchange Rate? Some Cross Sectional Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 32(1), pages 118-138, February.
    14. Christian Schmidt & Udo Broll, 2009. "Real exchange-rate uncertainty and US foreign direct investment: an empirical analysis," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(3), pages 513-530, October.
    15. Michael Parkin, 2014. "The Effects of Central Bank Independence and Inflation Targeting On Macroeconomic Performance: Evidence from Natural Experiments," Review of Economic Analysis, Digital Initiatives at the University of Waterloo Library, vol. 6(1), pages 1-35, June.
    16. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-162, May.
    17. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    18. Mr. Ayhan Kose & Mr. Kenneth Rogoff & Mr. Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 2003/007, International Monetary Fund.
    19. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
    20. Cushman, David O, 1985. "Real Exchange Rate Risk, Expectations, and the Level of Direct Investment," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 297-308, May.
    21. Kozo Kiyota & Shujiro Urata, 2004. "Exchange Rate, Exchange Rate Volatility and Foreign Direct Investment," The World Economy, Wiley Blackwell, vol. 27(10), pages 1501-1536, November.
    22. Grier, Kevin B. & Perry, Mark J., 1998. "On inflation and inflation uncertainty in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 17(4), pages 671-689, August.
    23. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," The World Bank Economic Review, World Bank, vol. 6(3), pages 353-398, September.
    24. Fountas, Stilianos, 2010. "Inflation, inflation uncertainty and growth: Are they related?," Economic Modelling, Elsevier, vol. 27(5), pages 896-899, September.
    25. World Bank, 2014. "World Development Indicators 2014," World Bank Publications - Books, The World Bank Group, number 18237.
    26. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    27. Peter Pedroni, 2001. "Purchasing Power Parity Tests in Cointegrated Panels," Department of Economics Working Papers 2001-01, Department of Economics, Williams College.
    28. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, December.
    29. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    30. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 727-731, November.
    31. TF. Nas & MJ. Perry, 2000. "Inflation, inflation uncertainty, and monetary policy in Turkey: 1960–1998," Contemporary Economic Policy, Western Economic Association International, vol. 18(2), pages 170-180, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Matthias Busse & Carsten Hefeker & Signe Nelgen, 2013. "Foreign Direct Investment and Exchange Rate Regimes," Economics Bulletin, AccessEcon, vol. 33(1), pages 843-858.
    2. Nadine McCloud & Michael S. Delgado & Man Jin, 2024. "Foreign capital inflows, exchange rates, and government stability," Empirical Economics, Springer, vol. 66(3), pages 945-977, March.
    3. Carlos De Resende, 2007. "Cross-Country Estimates of the Degree of Fiscal Dominance and Central Bank Independence," Staff Working Papers 07-36, Bank of Canada.
    4. BADALYAN, Gohar & HERZFELD, Thomas & RAJCANIOVA, Miroslava, 2014. "Transport Infrastructure And Economic Growth: Panel Data Approach For Armenia, Georgia And Turkey," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra, vol. 17(2), pages 1-10, October.
    5. Duc Hong Vo & Anh The Vo & Zhaoyong Zhang, 2019. "Exchange Rate Volatility and Disaggregated Manufacturing Exports: Evidence from an Emerging Country," JRFM, MDPI, vol. 12(1), pages 1-25, January.
    6. Omri, Anis, 2018. "Entrepreneurship, sectoral outputs and environmental improvement: International evidence," Technological Forecasting and Social Change, Elsevier, vol. 128(C), pages 46-55.
    7. Hermann Sintim-Aboagye & Chandana Chakraborty & Serapio Byekwaso, 2012. "Uncertainty of inflation and inflation rate: Does credibility of inflation policy matter?," Economic Issues Journal Articles, Economic Issues, vol. 17(2), pages 95-110, September.
    8. Günes Kamber & Özer Karagedikli & Christie Smith, 2015. "Applying an Inflation-Targeting Lens to Macroprodential Policy "Institutions"," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 395-429, September.
    9. Stéphane Goutte & David Guerreiro & Bilel Sanhaji & Sophie Saglio & Julien Chevallier, 2019. "International Financial Markets," Post-Print halshs-02183053, HAL.
    10. Kodongo, Odongo & Ojah, Kalu, 2013. "Real exchange rates, trade balance and capital flows in Africa," Journal of Economics and Business, Elsevier, vol. 66(C), pages 22-46.
    11. Warren Moraghen & Boopen Seetanah & Noor Sookia, 2021. "Impact of exchange rate and exchange rate volatility on foreign direct investment inflow for Mauritius: A dynamic time series approach," African Development Review, African Development Bank, vol. 33(4), pages 581-591, December.
    12. Shauna Phillips & Fredoun Z. Ahmadi-Esfahani, 2008. "Exchange rates and foreign direct investment: theoretical models and empirical evidence ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(4), pages 505-525, December.
    13. Chia‐Ching Lin & Kun‐Ming Chen, 2022. "Market competition, exchange rate uncertainty, and foreign direct investment," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 405-422, February.
    14. Pegkas, Panagiotis, 2015. "The impact of FDI on economic growth in Eurozone countries," The Journal of Economic Asymmetries, Elsevier, vol. 12(2), pages 124-132.
    15. Qi, Jianhong & Liu, Hui & Zhang, Zhaoyong, 2021. "Exchange rate uncertainty and the timing of Chinese Outward Direct Investment," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1193-1204.
    16. Phillips, Shauna & Ahmadi-Esfahani, Fredoun Z., 2008. "Exchange Rates and Foreign Direct Investment: Theoretical Models and Empirical Evidence," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-21.
    17. Ftiti, Zied & Aguir, Abdelkader & Smida, Mounir, 2017. "Time-inconsistency and expansionary business cycle theories: What does matter for the central bank independence–inflation relationship?," Economic Modelling, Elsevier, vol. 67(C), pages 215-227.
    18. Bernstein, Ronald & Madlener, Reinhard, 2011. "Responsiveness of Residential Electricity Demand in OECD Countries: A Panel Cointegation and Causality Analysis," FCN Working Papers 8/2011, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    19. Nicholas Apergis & Dan Constantin Danuletiu, 2014. "Renewable Energy and Economic Growth: Evidence from the Sign of Panel Long-Run Causality," International Journal of Energy Economics and Policy, Econjournals, vol. 4(4), pages 578-587.
    20. Olimpia Neagu, 2019. "The Link between Economic Complexity and Carbon Emissions in the European Union Countries: A Model Based on the Environmental Kuznets Curve (EKC) Approach," Sustainability, MDPI, vol. 11(17), pages 1-27, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:atlecj:v:45:y:2017:i:4:d:10.1007_s11293-017-9549-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.