Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, Marcos Chamon, 26 November 2015

Some scholars view capital inflows as contractionary, but many policymakers view them as expansionary. Evidence supports the policymakers. This column introduces an analytic framework that knits together the two views. For a given policy rate, bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary.

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