Capital Inflows, Financial Development, and Domestic Investment: Determinants and Inter-Relationships
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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.
Series:
Working Paper No. 2012/120
Subject:
Balance of payments Capital inflows Domestic credit Export performance Exports International trade Money National accounts Return on investment
English
Publication Date:
May 1, 2012
ISBN/ISSN:
9781475503494/1018-5941
Stock No:
WPIEA2012120
Pages:
22
Please address any questions about this title to publications@imf.org