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Can financial development cure the Dutch disease?
Author(s) -
Saborowski Christian
Publication year - 2011
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.419
Subject(s) - economics , dutch disease , exchange rate , foreign exchange , financial market , monetary economics , capital market , emerging markets , capital (architecture) , financial sector development , panel data , financial sector , capital flows , international economics , macroeconomics , finance , market economy , history , liberalization , archaeology , econometrics
We argue that, in improving the efficient allocation of resources, financial sector development should dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets—the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate—can be mitigated partly by means of developing a deep financial sector. Copyright © 2010 John Wiley & Sons, Ltd.