Capital flows and exchange rates

Quarterly Bulletin 2001 Q3
Published on 01 September 2001

By Andrew Bailey of the Bank’s International Economic Analysis Division, and Stephen Millard and Simon Wells of the Bank’s Monetary Instruments and Markets Division

This article focuses on the possible role of capital flows in explaining exchange rate movements. Some commentators have suggested that a substantial increase in capital flows into the United States could have accounted for the recent appreciation of the US dollar. This could imply that capital inflows have increased in response to a rise in the rate of return on capital, which in turn has reflected the structural increase in US productivity seen in recent years. We find evidence to suggest that this may explain part of the recent dollar appreciation, but unsurprisingly it does not provide a full explanation.

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