Title: The relationship between exchange rate volatility and capital inflows in emerging markets: the role of financial development

Authors: Pham T.T. Trinh; Nguyen T.H. Vinh

Addresses: International Economics Faculty, Hochiminh University of Banking, Vietnam ' International Economics Faculty, Hochiminh University of Banking, Vietnam

Abstract: This study investigates the role of financial development in the effect of exchange rate volatility on capital inflows. The threshold methodology and GMM estimation are employed to analyse the panel dataset of 20 emerging countries from 2010 to 2019. Two types of inflows are involved in the studies including foreign direct investment and portfolio investment to examine the responses of different inflows to exchange rate risk. Financial development is measured by two traditional indices including ratios of broad money to GDP and domestic credit to GDP. The results indicate a negative relationship between exchange rate volatility and capital inflows. However, financial development can reduce the detrimental influence of exchange rate volatility on capital inflows. This result suggests an improvement of financial development is necessary for diminishing the negative effect of exchange rate volatility. Emerging countries with low financial development should stabilise the exchange rate to attract more capital inflows.

Keywords: capital inflows; exchange rate volatility; EXV; financial development; emerging markets.

DOI: 10.1504/GBER.2024.138817

Global Business and Economics Review, 2024 Vol.30 No.4, pp.404 - 420

Received: 30 Jul 2022
Accepted: 29 Nov 2022
Published online: 31 May 2024 *

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