CAPITAL INFLOWS, EXTERNAL SHOCKS, AND THE REAL EXCHANGE-RATE

This paper examines the effects of a fall in world interest rates on c apital flows and the real exchange rate in an optimizing framework wit h imperfect capital markets. A permanent fall leads to a steady-state reduction in net foreign assets and a real depreciation, regardless of whether the country is initially a net creditor or net debtor. On imp act, the real exchange rate appreciates in the net debtor case, but ma y either appreciate or depreciate in the net creditor case. The dynami cs associated with a temporary shock depend not only on its duration b ut also on the initial asset position. (C) 1998 Elsevier Science Ltd. All rights reserved. JEL classifications: E44, F32, F34.