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

IMF Working Papers, May 1, 2012

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

Examines determinants of, and interactions between, capital inflows, financial development, and domestic investment in developing countries during 2001-07.
Focus on 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.
Large cross-country differences in domestic and international finance are best explained by fundamentals such as:
- institutional quality,
- access to international export markets,
- an appropriate macroeconomic policy.
Both private capital inflows and domestic credit exert a positive effect on investment.
Private capital inflows and domestic credit mediate most of the investment impact of:
- the global price of risk,
- domestic borrowing costs.
Neither greater domestic credit nor greater institutional quality increase the extent to which capital inflows translate into domestic investment (a surprising null result).

Balance of payments, Capital inflows, Domestic credit, Export performance, Exports, International trade, Money, National accounts, Return on investment
Keywords include: borrowing cost, Capital flows, Capital inflows, cost of capital, Developing Countries, domestic credit, Export performance, Financial Development, GDP increase, Global, investment, investment estimation, net capital inflow, Return on investment, terms-of-trade index, WP

Source: IMF Working Paper by Nikola Spatafora and Oana Luca, May 1, 2012.