Financial flows to developing and advanced countries: determinants and implications
Purpose – The purpose of this paper is to establish a model to study the determinants of financial flows, portfolio and foreign direct investment (FDI) flows, and the impact of these determinants on economic variables in samples of developing and advanced countries. The analysis then turns to an evaluation of the effects of external flows on economic activity. Design/methodology/approach – To that end, the paper follows a two-step procedure. First, the paper estimates a series of reduced-form equations in differenced form, using annual data, for the current and the financial account balances as well as important underlying components, using a number of macroeconomic indicators reflecting the state of the business cycle as explanatory variables. These include not only a measure of economic growth, but also other factors that vary cyclically, such as the exchange rate and energy prices. In addition, the paper examines the effect of positive and negative shocks to these and other cyclical variables on components of the balance of payments. Second, the results are summarized in three directions. First, cross-country correlations evaluate time-series co-movements between the current account balance and external flows with respect to major determinants of cyclicality across the samples of advanced and developing countries. Second, time-series regressions evaluate the direct effects of financial flows on the current account balance within the samples of developing and advanced countries. Third, cross-country regressions evaluate the impact of movements in trend and variability of financial flows on major economic indicators across the samples of developing and advanced countries. Findings – The results are summarized in three directions. Across the samples of advanced and developing countries, the pervasive evidence highlights the negative correlation between the responses of the current account balance and the financial balance with respect to the various sources of cyclicality in the time-series model. Second, using time-series regressions the bulk of the evidence indicates that an increase in financial flows helps finance a widening current account deficit. Third, cross-country regressions evaluate the impact of movements in trend and variability of financial flows on major economic indicators across the samples of developing and advanced countries. While FDI flows appear significant in differentiating growth performance within and across developing countries, their effects appear to be limited on growth performance in advanced countries. Portfolio flows are more relevant, compared to FDI flows, to financing a wider current account deficit, both in developing and advanced countries. Originality/value – Overall, the evidence presented in this paper establishes the importance of financial flows to external balances and macroeconomic performance within and across the samples of developing and advanced countries. In light of this evidence, macroeconomic policies should target a combination of external balances that can be easily financed by external inflows and align domestic policies to achieve the desired cyclicality in external balances, available financing, and macroeconomic performance.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 10 (2011)
Issue (Month): 1 (April)
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://www.emeraldinsight.com/ijdi.htm Email:
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998.
"How does foreign direct investment affect economic growth?1,"
Journal of International Economics,
Elsevier, vol. 45(1), pages 115-135, June.
- Eduardo Borensztein & Jose De Gregorio & Jong-Wha Lee, 1995. "How Does Foreign Direct Investment Affect Economic Growth?," NBER Working Papers 5057, National Bureau of Economic Research, Inc.
- Kandil, Magda, 2009. "Demand-side stabilization policies: What is the evidence of their potential?," Journal of Economics and Business, Elsevier, vol. 61(3), pages 261-276.
- James Peery Cover, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1261-1282.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990.
"Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?,"
8905, Michigan State - Econometrics and Economic Theory.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
- Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864 Elsevier.
- Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
- Adrian Pagan, 1986.
"Two Stage and Related Estimators and Their Applications,"
Review of Economic Studies,
Oxford University Press, vol. 53(4), pages 517-538.
- Adrian Pagan, 1985. "Two Stage and Related Estimators and Their Applications," Cowles Foundation Discussion Papers 741, Cowles Foundation for Research in Economics, Yale University.
- Baxter, M., 1994.
"International Trade and Business Cycles,"
RCER Working Papers
390, University of Rochester - Center for Economic Research (RCER).
- Menzie D. Chinn & Eswar S. Prasad, 2000.
"Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration,"
NBER Working Papers
7581, National Bureau of Economic Research, Inc.
- Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
- Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
- Engle, Robert F., 1982. "A general approach to lagrange multiplier model diagnostics," Journal of Econometrics, Elsevier, vol. 20(1), pages 83-104, October.
- Caroline L. Freund, 2000. "Current account adjustment in industrialized countries," International Finance Discussion Papers 692, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:eme:ijdipp:v:10:y:2011:i:1:p:60-91. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Virginia Chapman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.