IMF Economic Review

, Volume 65, Issue 3, pp 563–585 | Cite as

Are Capital Inflows Expansionary or Contractionary? Theory, Policy Implications, and Some Evidence

  • Olivier Blanchard
  • Jonathan D. Ostry
  • Atish R. Ghosh
  • Marcos ChamonEmail author


The workhorse open economy macromodel suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers, however, believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets included in the Mundell–Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. We explore the implications theoretically and empirically and find support for the key predictions in the data.


F31 F32 

Supplementary material

41308_2017_39_MOESM1_ESM.xlsx (69 kb)
Supplementary material 1 (XLSX 68 kb)


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Copyright information

© International Monetary Fund 2017

Authors and Affiliations

  • Olivier Blanchard
    • 1
  • Jonathan D. Ostry
    • 2
  • Atish R. Ghosh
    • 2
  • Marcos Chamon
    • 2
    Email author
  1. 1.Peterson Institute for International EconomicsWashingtonUSA
  2. 2.Research DepartmentInternational Monetary FundWashingtonUSA

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