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Financial liberalisation, exchange rate dynamics and the financial Dutch disease in developing and emerging economies

Financial liberalisation, exchange rate dynamics and the financial Dutch disease in developing and emerging economies

Botta, Alberto ORCID: 0000-0001-9464-8251 (2021) Financial liberalisation, exchange rate dynamics and the financial Dutch disease in developing and emerging economies. In: Bonizzi, Bruno, Kaltenbrunner, Annina and Ramos, Raquel A., (eds.) Emerging Economies and the Global Financial System: Post-Keynesian Analysis. Routledge Critical Studies in Finance and Stability . Routledge, London, pp. 181-196. ISBN 978-0367111427 (doi:https://doi.org/10.4324/9780429025037-17)

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Abstract

Economic literature has devoted significant attention to the effects that financial and capital account liberalisation, and the ensuing increase in capital flows, has produced on the macroeconomic dynamics of developing and emerging economies in the last three decades. Emphasis has been put on macro-aggregated variables and macro stability mainly. Nonetheless, mounting and increasingly mobile international capitals can affect the development process of the recipient economies in another perhaps more subtle and long-lasting way, i.e. by affecting their productive structures. Indeed, capital flows, and portfolio investment in particular, may cause medium-term cycles in the evolution of the nominal and real exchange rates, in which an initial period of appreciation is then followed by a more or less intense depreciation, if not exchange rate collapse. Two consequences of such dynamics likely emerge as to the productive structure of developing and emerging economies. First, the initial exchange rate appreciation causes a loss of competitiveness of developing countries’ tradable goods, hindering their capacity to develop domestic non-traditional tradable sectors by exporting on the international goods market. Secondly, exchange rate volatility and more general macroeconomic instability discourages often irreversible investments in the real sector of the economy, manufacturing in particular. In the end, what emerges in a sort of financial Dutch disease, in which booming international capitals play the role usually attributed to overdependence on natural resources as relevant cause of developing countries’ backwardness. The aim of this chapter is to analyse the mechanisms through which a financial Dutch disease may take place, as well as available policy options to tackle it.

Item Type: Book Section
Additional Information: Ch. 13
Uncontrolled Keywords: Financial Dutch disease, financial booms, structural change, development traps
Subjects: H Social Sciences > HB Economic Theory
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Related URLs:
Last Modified: 08 Jun 2021 20:54
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None
URI: http://gala.gre.ac.uk/id/eprint/32110

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