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Capital Inflows, Financial Development, and Domestic Investment

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  • Nicola Spatafora
  • Oana Luca

Abstract

We examine determinants of, and interactions between, capital inflows, financial development, and domestic investment in developing countries during 2001-07, a period of surging global liquidity and low interest rates. Reductions in the global price of risk and in domestic borrowing costs were the main contributors to the increase over time in net capital inflows and domestic credit. However, the large cross-country differences in domestic and international finance are best explained by fundamentals such as institutional quality, access to international export markets, and an appropriate macroeconomic policy. Both private capital inflows and domestic credit exert a positive effect on investment; they also mediate most of the investment impact of the global price of risk and domestic borrowing costs. Surprisingly, neither greater domestic credit nor greater institutional quality increase the extent to which capital inflows translate into domestic investment.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/120.

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Length: 22
Date of creation: 01 May 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/120

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Keywords: Capital flows; Developing countries; Capital inflows; Credit expansion; Domestic investment; Economic growth; Economic models; domestic credit; private capital inflows; cost of capital; private capital; net capital; exports of goods; export markets; exporter; export market; private finance; domestic borrowing; equity inflows; net capital flows; export ratio; foreign capital; export growth; foreign capital inflows; access to international export markets; international capital flows; total exports; international capital; capital flow; private flows; share of exports; determinants of capital flows; fuel exports; export growth rates; consumer price index; export structure; corporate bonds; international markets; export share; market bond; capital depreciation;

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  1. Gourio, Fran├žois & Siemer, Michael & Verdelhan, Adrien, 2013. "International risk cycles," Journal of International Economics, Elsevier, vol. 89(2), pages 471-484.
  2. Marcel Fratzscher, 2011. "Capital Flows, Push versus Pull Factors and the Global Financial Crisis," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  3. Mody, Ashoka & Murshid, Antu Panini, 2005. "Growing up with capital flows," Journal of International Economics, Elsevier, vol. 65(1), pages 249-266, January.
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  5. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 173-222, January.
  6. Panicos O. Demetriades & Khaled A.Hussein, 1995. "Does Financial Development Cause Economic Growth? Time-Series Evidence from 16 Countries," Keele Department of Economics Discussion Papers (1995-2001) 95/13, Department of Economics, Keele University.
  7. Panicos O. Demetriades & Philip Arestis, 1996. "Financial Development and Economic Growth: Assessing the Evidence," Keele Department of Economics Discussion Papers (1995-2001) 96/16, Department of Economics, Keele University.
  8. Badi H. Baltagi & Panicos O. Demetriades & Siong Hook Law, 2008. "Financial Development and Openness: Evidence from Panel Data," Center for Policy Research Working Papers 107, Center for Policy Research, Maxwell School, Syracuse University.
  9. Farrokh Nourzad, 2002. "Financial development and productive efficiency: A panel study of developed and developing countries," Journal of Economics and Finance, Springer, vol. 26(2), pages 138-148, June.
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Cited by:
  1. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, vol. 18(C), pages 1-18.

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