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Growth From International Capital Flows; The Role of Volatility Regimes

  • Antu Panini Murshid
  • Ashoka Mody

Recent commentary has downplayed the growth dividend from international financial integration, highlighting the possibly negative correlation between capital inflows and long-run growth. This paper presents new evidence consistent with standard economic theory and a more benign interpretation of cross-border private capital flows. The key observation is that a country’s growth volatility changes over time. With volatility below a threshold, an inflow of foreign capital has promoted growth. However, during periods of volatile growth, more flows have been associated with slower growth. Volatility levels and changes reflect an interaction of domestic production and institutional structures with global factors.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/90.

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Length: 41
Date of creation: 01 Apr 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/90
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  1. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  2. Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1484-1515.
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