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Capital Inflows, Financial Development, and Domestic Investment; Determinants and Inter-Relationships

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  • Nicola Spatafora
  • Oana Luca

Abstract

We examine determinants of, and interactions between, capital inflows, financial development, and domestic investment in developing countries during 2001-07, a period of surging global liquidity and low interest rates. Reductions in the global price of risk and in domestic borrowing costs were the main contributors to the increase over time in net capital inflows and domestic credit. However, the large cross-country differences in domestic and international finance are best explained by fundamentals such as institutional quality, access to international export markets, and an appropriate macroeconomic policy. Both private capital inflows and domestic credit exert a positive effect on investment; they also mediate most of the investment impact of the global price of risk and domestic borrowing costs. Surprisingly, neither greater domestic credit nor greater institutional quality increase the extent to which capital inflows translate into domestic investment.

Suggested Citation

  • Nicola Spatafora & Oana Luca, 2012. "Capital Inflows, Financial Development, and Domestic Investment; Determinants and Inter-Relationships," IMF Working Papers 12/120, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/120
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    3. Gozgor, Giray, 2014. "Determinants of domestic credit levels in emerging markets: The role of external factors," Emerging Markets Review, Elsevier, vol. 18(C), pages 1-18.
    4. Hawkes, Denise Donna & Yerrabati, Sridevi, 2015. "Institutions and investment in South and East Asia & Pacific region: Evidence from meta-analysis," Economics Discussion Papers 2015-62, Kiel Institute for the World Economy (IfW).
    5. López-Laborda, Julio & Peña, Guillermo, 2016. "Is financial VAT neutral to financial sector size?," Economics Discussion Papers 2016-31, Kiel Institute for the World Economy (IfW).
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    7. Alex Bowen & Emanuele Campiglio & Massimo Tavoni, 2014. "A Macroeconomic Perspective On Climate Change Mitigation: Meeting The Financing Challenge," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 1-35.
    8. Yerrabati, Sridevi & Hawkes, Denise Donna, 2016. "Institutions and Investment in the South and East Asia and Pacific Region: Evidence from Meta-Analysis," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 10, pages 1-48.

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