IDEAS home Printed from https://ideas.repec.org/p/lec/leecon/10-06.html
   My bibliography  Save this paper

Financial Restraints and Private Investment: Evidence from a Nonstationary Panel

Author

Listed:
  • Panicos Demetriades

  • Mauro Costantini
  • Gregory James

  • Kevin Lee

Abstract

We employ recently developed panel data methods to estimate a model of private investment under financial restraints for 20 developing countries using annual data for 1972-2000. We show that the qualitative nature of the results varies depending on whether we take into account cross-country effects. When we allow for cross-sectional dependence, investment displays more sensitivity to world capital market conditions and exchange rate uncertainty. A perhaps even more surprising result is the finding that countries that managed to suppress domestic real interest rates without generating high inflation enjoyed higher levels of private investment than those that would have been obtained under liberalized conditions.

Suggested Citation

  • Panicos Demetriades & Mauro Costantini & Gregory James & Kevin Lee, 2010. "Financial Restraints and Private Investment: Evidence from a Nonstationary Panel," Discussion Papers in Economics 10/06, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:10/06
    as

    Download full text from publisher

    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp10-06.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    2. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    3. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
    4. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September.
    5. Ang, James B., 2011. "Financial development, liberalization and technological deepening," European Economic Review, Elsevier, vol. 55(5), pages 688-701, June.
    6. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    7. Demetriades, Panicos O. & Luintel, Kul B., 2001. "Financial restraints in the South Korean miracle," Journal of Development Economics, Elsevier, vol. 64(2), pages 459-479, April.
    8. Chang, Yoosoon & Park, Joon Y. & Song, Kevin, 2006. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 133(2), pages 703-739, August.
    9. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, July.
    10. Arestis, Philip & Demetriades, Panicos O, 1997. "Financial Development and Economic Growth: Assessing the Evidence," Economic Journal, Royal Economic Society, vol. 107(442), pages 783-799, May.
    11. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
    12. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
    13. Svetlana Andrianova & Panicos Demetriades & Anja Shortland, 2012. "Government Ownership of Banks, Institutions and Economic Growth," Economica, London School of Economics and Political Science, vol. 79(315), pages 449-469, July.
    14. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    15. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    16. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    17. Luciano Gutierrez, 2006. "Panel Unit‐root Tests for Cross‐sectionally Correlated Panels: A Monte Carlo Comparison," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 519-540, August.
    18. Stefano Fachin, 2004. "Bootstrap inference on Fully Modified Estimates of Cointegrating Coefficients: A Comment," Economics Bulletin, AccessEcon, vol. 3(13), pages 1-8.
    19. Ajit Singh, 1998. "Financial liberalisation, stockmarkets and economic development," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 8(1), pages 165-182.
    20. Diaz-Alejandro, Carlos, 1985. "Good-bye financial repression, hello financial crash," Journal of Development Economics, Elsevier, vol. 19(1-2), pages 1-24.
    21. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    22. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    23. repec:bla:obuest:v:61:y:1999:i:0:p:653-70 is not listed on IDEAS
    24. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    25. Abdul Abiad & Ashoka Mody, 2005. "Financial Reform: What Shakes It? What Shapes It?," American Economic Review, American Economic Association, vol. 95(1), pages 66-88, March.
    26. Demetriades, Panicos O & Devereux, Michael P, 2000. "Investment and Financial Restraints: Theory and Evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 285-296, October.
    27. Christian Gengenbach & Franz C. Palm & Jean‐Pierre Urbain, 2006. "Cointegration Testing in Panels with Common Factors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 683-719, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tim Buyse & Freddy Heylen & Ruben Schoonackers, 2015. "On The Role Of Public Policies And Wage Formation For Private Investment In R&D: A Long-Run Panel Analysis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 15/911, Ghent University, Faculty of Economics and Business Administration.
    2. Costantini, Mauro & Fragetta, Matteo & Melina, Giovanni, 2014. "Determinants of sovereign bond yield spreads in the EMU: An optimal currency area perspective," European Economic Review, Elsevier, vol. 70(C), pages 337-349.
    3. Zhang, Fang & Yang, Lianxing, 2020. "Financing constraints and ODI margins: Evidence from China," Economic Systems, Elsevier, vol. 44(1).
    4. Brian Muyambiri & Nicholas M. Odhiambo, 2018. "The Impact Of Financial Development On Investment: A Review Of International Literature," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 9(2).
    5. O’Toole Conor M., 2014. "Does Financial Liberalisation Improve Access to Investment Finance in Developing Countries?," Journal of Globalization and Development, De Gruyter, vol. 5(1), pages 41-74, June.
    6. Gerdie Everaert & Freddy Heylen & Ruben Schoonackers, 2015. "Fiscal policy and TFP in the OECD: measuring direct and indirect effects," Empirical Economics, Springer, vol. 49(2), pages 605-640, September.
    7. Costantini, Mauro & Gutierrez, Luciano, 2013. "Capital mobility and global factor shocks," Economics Letters, Elsevier, vol. 120(3), pages 513-515.
    8. Ang, James B., 2014. "Innovation and financial liberalization," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 214-229.
    9. James B. ANG, 2014. "Innovation and Financial Liberalization: The Case of India," Economic Growth Centre Working Paper Series 1404, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karikallio, Hanna, 2015. "Cross-commodity Price Transmission and Integration of the EU Livestock Market of Pork and Beef: Panel Time-series Approach," 2015 Conference, August 9-14, 2015, Milan, Italy 211832, International Association of Agricultural Economists.
    2. Daniel, Betty C. & Shiamptanis, Christos, 2013. "Pushing the limit? Fiscal policy in the European Monetary Union," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2307-2321.
    3. In Choi, 2012. "Panel Cointegration," Working Papers 1208, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    4. Gutierrez, Luciano & Erickson, Kenneth W. & Westerlund, Joakim, 2005. "The Present Value Model, Farmland Prices and Structural Breaks," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24702, European Association of Agricultural Economists.
    5. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non‐Stationary Panel Data Models?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 752-773, September.
    6. Costantini, Mauro & Destefanis, Sergio, 2009. "Cointegration analysis for cross-sectionally dependent panels: The case of regional production functions," Economic Modelling, Elsevier, vol. 26(2), pages 320-327, March.
    7. Yasemin Özerkek & Sadullah Çelik, 2010. "The Link between Government Spending, Consumer Confidence and Consumption Expenditures in Emerging Market Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(4), pages 471-485, December.
    8. Frauke Dobnik, 2013. "Long-run money demand in OECD countries: what role do common factors play?," Empirical Economics, Springer, vol. 45(1), pages 89-113, August.
    9. Valérie Mignon & Christophe Hurlin, 2005. "Une synthèse des tests de racine unitaire sur données de panel," Économie et Prévision, Programme National Persée, vol. 169(3), pages 253-294.
    10. Jushan Bai & Josep Lluís Carrion‐i‐Silvestre, 2013. "Testing panel cointegration with unobservable dynamic common factors that are correlated with the regressors," Econometrics Journal, Royal Economic Society, vol. 16(2), pages 222-249, June.
    11. Acikgoz, Senay & Ben Ali, Mohamed Sami, 2019. "Where does economic growth in the Middle Eastern and North African countries come from?," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 172-183.
    12. Dobnik, Frauke, 2011. "Energy Consumption and Economic Growth Revisited: Structural Breaks and Cross-section Dependence," Ruhr Economic Papers 303, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    13. Breitung, Jörg & Pesaran, Mohammad Hashem, 2005. "Unit roots and cointegration in panels," Discussion Paper Series 1: Economic Studies 2005,42, Deutsche Bundesbank.
    14. Betty C. Daniel & Christos Shiamptanis, 2008. "Fiscal policy in the European Monetary Union," International Finance Discussion Papers 961, Board of Governors of the Federal Reserve System (U.S.).
    15. Joëts, Marc & Mignon, Valérie, 2012. "On the link between forward energy prices: A nonlinear panel cointegration approach," Energy Economics, Elsevier, vol. 34(4), pages 1170-1175.
    16. Markus Eberhardt & Francis Teal, 2011. "Econometrics For Grumblers: A New Look At The Literature On Cross‐Country Growth Empirics," Journal of Economic Surveys, Wiley Blackwell, vol. 25(1), pages 109-155, February.
    17. Byrne, Joseph P. & Fiess, Norbert & MacDonald, Ronald, 2011. "The global dimension to fiscal sustainability," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 137-150, June.
    18. Olivier Damette & Philippe Froute, 2010. "Is the crisis treatment exacerbating cautiousness or risk-taking?," Applied Financial Economics, Taylor & Francis Journals, vol. 20(3), pages 213-218.
    19. Wagner, Martin, 2008. "The carbon Kuznets curve: A cloudy picture emitted by bad econometrics?," Resource and Energy Economics, Elsevier, vol. 30(3), pages 388-408, August.
    20. María Santana-Gallego & Francisco Ledesma-Rodríguez & Jorge Pérez-Rodríguez, 2011. "Tourism and trade in OECD countries. A dynamic heterogeneous panel data analysis," Empirical Economics, Springer, vol. 41(2), pages 533-554, October.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lec:leecon:10/06. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Abbie Sleath (email available below). General contact details of provider: https://edirc.repec.org/data/deleiuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.