Financial integration, capital flows, and exchange rate stability in Mozambique: empirical evidence with ARDL models (1996-2023)

This paper aims to analyze the effects of capital account liberalization on exchange rate stability in Mozambique from 1996 to 2023, using the ARDL (Autoregressive Distributed Lag) methodology. The results indicate that capital flows, such as foreign direct investment (FDI) and net foreign assets (NFA), reduce exchange rate stability, while the net international investment position (NIIP) shows no significant effects. The control variables highlight the complexity of the scenario, as monetary independence and inflation increase exchange rate instability, while export diversification and interest rate differentials contribute to stability, although to a limited extent. International reserves, although fundamental for mitigating external shocks, have a reduced impact on exchange rate stabilization. The findings suggest that capital account liberalization, without strengthening mechanisms to promote internal macroeconomic stability, may expose Mozambique to greater exchange rate volatility in the long term. Thus, a gradual approach, combined with policies that encourage export diversification and inflation control, is essential to balance the benefits of global financial integration with the need for macroeconomic stability.