DOI: 10.5716/978-981-08-9514-3_MME35
Authors: Almukhtar S. Al-Abri
Abstract:
Over the past two decades, many developing countries have liberalized their capital accounts and seek greater financial integration with the rest of the world. However, such movement toward greater financial openness has brought new challenges to these economies, among which are the vulnerability to financial crises and faster transmission of shocks to both real and financial sectors. This paper contributes to the literature by examining empirically the role of capital mobility and financial openness in real exchange rate fluctuations. Using a panel of 32 primary commodity countries during the period from 1980-2009, the paper finds that opening the capital account and deepening the country's international financial integration can slightly increase the real effective exchange rate variations. Nevertheless, the empirical results suggest that freeing the capital account and allowing greater financial integration seem to dampen the effect of the relative productivity differential on the real effective exchange rate. This suggests a stabilizing role for capital mobility and financial openness. This finding supports the hypothesis that increasing capital mobility and financial integration could cause faster relative prices adjustment, hence, faster PPP reversion to long-run equilibrium.
Keywords: real exchange rate volatility; capital mobility; financial integration; primary commodity economies
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