Author details

Toward the early 1970s, the field opened up in many directions. The formal orientation had led to interest in empirical work, and soon questions of capital mobility, or trade and payment

Multipliers increases as the degree of capital mobility

Multipliers decreases as the degree of capital mobility

Policy Zero mobility Low capital mobility High capital mobility Perfect mobility

1 SyþZy

1 Ly

0

Expansionary monetary policy 0 0 0 0 Expansionary fiscal policy 0 Multipliers increases as the degree of capital mobility increases

increases

increases

Table 1. The effects of monetary and fiscal policies under various exchange rate regimes.

There was a perception, almost up to the late 1980s, that the emerging countries were not different from the developed ones except for levels of per capita. The developed country represented to the developing country a mirror image of its future [15]. However, it is not like that. There are completely different problems in emerging countries because of the differences in social life, geography, that is, the location of the country and political problems. Emerging countries' lack of structural reforms and shallow financial markets curb economic growth. To overcome this obstacle, emerging countries must give priority to the reforms and financial

The early 1990s have witnessed a large increase in capital inflows to emerging countries. These flows are characterized according to their magnitude, timing, regional and country destination, asset composition and sectoral destination. This chapter examines the nature of the capital inflows in a theoretical way. There may be various responses undertaken by the recipient countries against capital inflows. Capital inflows result in huge expansion of aggregate demand resulting in an increase in domestic inflation and an appreciation of the real exchange rate. Specifically, with a predetermined exchange rate, capital inflows generate an overall balance of payment surplus. This may cause appreciation of the nominal exchange rate. The Central Bank has to intervene in the foreign exchange market to buy the excess supply of foreign currency at the current rate to avoid an appreciation of the nominal exchange rate. Thus, monetary base expands. Base expansion would lead to growth in broader monetary aggregates, which results in an expansion of aggregate demand. This would increase domestic price level. Rising domestic prices with fixed nominal exchange rate would imply an appreciation of the real exchange rate. Policymakers can break this chain trough a policy intervention.

• Limit the net capital inflow. This can be done in two ways: firstly, by limiting gross capital inflow and secondly by allowing more gross capital outflow. Inflow of capital usually

adjustment, become popular areas of applied research.

LrSyþIrLy

266 Financial Management from an Emerging Market Perspective

LrSyþIrLy

These interventions are as follows [23]:

There exist policies, which:

markets.

Fixed exchange rate regime

Flexible exchange rate regime Expansionary monetary policy Ir

Expansionary fiscal policy Lr

Okyay Ucan\* and Nizamettin Basaran

\*Address all correspondence to: okyayu@hotmail.com

Nigde Omer Halisdemir University, Nigde, Turkey
