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The impact of capital flows on domestic investment in transition economies

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  • Mileva, Elitza

Abstract

During the 1990s most transition economies undertook a series of market reforms, including opening their capital accounts. This paper uses static and dynamic panel techniques to assess the effect of FDI, foreign loans and portfolio flows on domestic investment. In this partial adjustment setup, capital flows can have contemporaneous and long-term effects on investment. For countries with less developed financial markets and weaker institutions, our estimates for the FDI coefficient are larger than one, suggesting FDI stimulates investment in other sectors of the economy ("spillover" effects). Over the longer term, each dollar of FDI generates at least one additional dollar of local investment. In transition countries with stronger governance indicators, long-term loans raise domestic investment and FDI produces small spillover effects in the long run. Limited portfolio flows into the transition economies have no effect on capital formation in either group. JEL Classification: F21, F30, P33

Suggested Citation

  • Mileva, Elitza, 2008. "The impact of capital flows on domestic investment in transition economies," Working Paper Series 871, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2008871
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    More about this item

    Keywords

    capital inflows; domestic investment; international financial integration; transition economies;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F30 - International Economics - - International Finance - - - General
    • P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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