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World financial liberalization and its effects on capital flows

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  • José Ricardo Santana & Fernando Garcia

Abstract

This paper investigates the determining factors in private capital flow, differentiating foreign direct investment (FDI) from other flows and emphasizing the role of financial liberalization and. Two reasons brought about this examination. The first is the substantial increase in private capital flow mainly in the 90s, not only in developed countries but also in developing ones. The second is a greater liberalization process in these economies. This article builds financial liberalization indicators based on political rules. The capital account liberalization is introduced as an explanatory variable in the model that investigates the determinants behind the capital flows. The resulting estimates confirm the econometric results suggested by some of the literature on the subject: the size of the market and the rate of inflation are important variables to explain the private capital flows, just like the infrastructure is relevant when it comes to developing nations. The positive influence of capital account liberalization on capital flows, which comes up in robust estimates, contrasts with the results included in the recent literature on this issue. The new findings are attributable to the differentiation between the types of capital flows, to the use of a proper liberalization indicator and to the econometric method applied

Suggested Citation

  • José Ricardo Santana & Fernando Garcia, 2004. "World financial liberalization and its effects on capital flows," Econometric Society 2004 Latin American Meetings 101, Econometric Society.
  • Handle: RePEc:ecm:latm04:101
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    File URL: http://repec.org/esLATM04/up.13833.1081458674.pdf
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    References listed on IDEAS

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    1. Stiglitz, Joseph E., 2000. "Capital Market Liberalization, Economic Growth, and Instability," World Development, Elsevier, vol. 28(6), pages 1075-1086, June.
    2. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-1196, September.
    3. Cemile Sancak, 2002. "Financial Liberalization and Real Investment; Evidence From Turkish Firms," IMF Working Papers 02/100, International Monetary Fund.
    4. Alicia H. Munnell, 1992. "Policy Watch: Infrastructure Investment and Economic Growth," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 189-198, Fall.
    5. Soto, Marcelo, 2003. "Taxing capital flows: an empirical comparative analysis," Journal of Development Economics, Elsevier, vol. 72(1), pages 203-221, October.
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    7. Machado, Roberto & Morley, Samuel A. & Pettinato, Stefano, 1999. "Indexes of structural reform in Latin America," Series Históricas 12, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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    10. Blanca Sanchez-Robles, 1998. "Infrastructure Investment And Growth: Some Empirical Evidence," Contemporary Economic Policy, Western Economic Association International, vol. 16(1), pages 98-108, January.
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    Cited by:

    1. José Ricardo Santana & Fernando Garcia, 2004. "New evidence of the impact of capital account liberalization on economic growth," Econometric Society 2004 Latin American Meetings 86, Econometric Society.

    More about this item

    Keywords

    Liberalization; Capital flows; FDI; determinants of capital flows;

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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