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What drives international financial flows? Politics, institutions and other determinants

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Author Info
Papaioannou, Elias
Abstract

This paper uses a large panel of financial flow data from banks to assess how institutions affect international lending. First, employing a time varying composite institutional quality index in a fixed-effects framework, the paper shows that institutional improvements are followed by significant increases in international finance. Second, cross-sectional models also show a strong effect of initial levels of institutional quality on future bank lending. Third, instrumental variable estimates further show that the historically predetermined component of institutional development is also a significant correlate of international bank inflows. The results thus suggest that institutional underdeveloped can explain a significant part of Lucas [Lucas, Robert E. 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?" American Economic Review (Papers and Proceedings), 80 (2): 92-96. 1990] paradox of why doesn't capital flow from rich to poor countries. The analysis also does a first-step towards understanding which institutional features affect international banking.

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Publisher Info
Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 2 (March)
Pages: 269-281
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Handle: RePEc:eee:deveco:v:88:y:2009:i:2:p:269-281

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Keywords: Capital flows Institutions Law and finance Politics Banks International finance;

Cited by:
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  1. Sebnem Kalemli-Ozcan & Elias Papaioannou & José-Luis Peydró, 2009. "What Lies Beneath the Euro's Effect on Financial Integration: Currency Risk, Legal Harmonization, or Trade?," NBER Working Papers 15034, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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