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What Drives International Financial Flows? Politics, Institutions and Other Determinants

  • Papaioannou, Elias

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 (1990) paradox of why doesn’t capital flow from rich to poor countries. The analysis also does a first-step towards understanding which exactly institutional features affect international banking.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7010.

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Date of creation: Oct 2008
Handle: RePEc:cpr:ceprdp:7010
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