Regional economic arrangements
This chapter considers the reason for the movement of capital from developed to developing countries and describes the various reasons why this can happen. It shows that it is normal for a developing country to be a net borrower from the rest of the world. The borrowing is a critical distinction must be made between debt and equity. The capital flows into developing countries in the form of equity financing. Its common form is foreign direct investment. An exchange rate shock could be due to either an appreciation or a depreciation of the currency, intervention in the foreign exchange market can be used to affect the exchange rate. The International Monetary Fund (IMF) acts as a lender of foreign exchange to countries that needed to temporarily intervene in the foreign exchange market. The chapter examines the new role for the IMF by looking at the various ways it now loans money to countries.