Does External Financing drive Growth?

How the volume, composition, and volatility of capital inflows can have different impacts on real exchange rate and economic growth

From:: Department for International Development
Published: 1 July 2016

Document Type:: Briefing
Theme:: Economic Growth
Authors:: Combes, Jean-Louis, Kinda, T, Ouedraogo, R, Plane, P, Haidara, A, Samba Mamadou, O

Abstract

Evidence for the growth impact of capital inflows remains open to question. Capital inflows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth by hampering competitiveness through a real appreciation of the exchange rate. This policy brief revisits the issue, focusing on a large sample of low- and middle-income countries. Drawing on a recent analytical paper, this brief discusses how the volume, composition, and volatility of capital inflows can have different impacts on real exchange rate and economic growth.

This work is part of the ‘Financial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries’ project

Citation

J-L. Combes, T. Kinda , R. Ouedraogo, P. Plane, O. Samba Mamadou, A. Haidara (2016) Does External Financing drive Growth? Fondation pour les études et recherches sur le développement international (FERDI) Policy Brief 153