I test the impact of financial capital inflows on the real exchange rate using a panel of 104 developing and transition economies. The results indicate that, on aggregate, financial capital inflows do not lead to appreciation of the real exchange rate, however, countries operating under a fixed exchange rate regime are more prone to real appreciations than countries adopting intermediate or floating regimes. Surprisingly, ODA inflows are found to be associated with a depreciation of the real exchange rate. I also find previous studies have overestimated remittance driven real appreciations by omitting from their analysis other inflows of financial capital. |