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

Author/Editor: Luca, Oana | Spatafora, Nicola
Authorized for Distribution: May 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,138KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
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Series: Working Paper No. 12/120
Subject(s): Capital inflows | Credit expansion | Developing countries | Development | Domestic investment | Economic growth | Economic models
Author's keyword(s): Capital flows | Financial Development | Investment | Developing Countries
 
English  
    Published:   May 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012120   Pages:   21
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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