Emerging market disinflation in the 1990s: The role of capital flow

Despite the number currency crises, the decade of the 1990s was generally a period of increased capital flows and falling inflation, particularly in developing countries. This dissertation uses a panel of 84 developing countries to explore the impact of capital flow on inflation rates. The results vary by exchange rates and capital market regimes. Short-term capital flows tend to be inflationary, but less so in floating exchange rate regimes. Net capital inflows are associated with inflationary real exchange rate appreciations, particularly in fixed exchange rate regimes. Higher capital mobility, as measured by to gross capital into and out of a country, tend reduce inflation, particularly in regimes with floating exchange rates and open capital markets. We review several models of inflation and currency crises consistent with the observed results. Overall our results suggest capital flows are associated with lower inflation, particularly in countries with flexible exchange rates and open capital markets.