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Capital Inflows, Financial Development, and Domestic Investment: Determinants and Inter-Relationships
Author:
Mr. Nikola Spatafora
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and
Ms. Oana Luca
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Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 120
Language:
English
Publication Date:
01 May 2012
DOI:
https://doi.org/10.5089/9781475503494.001
ISBN:
9781475503494
ISSN:
1018-5941
Pages:
22
Keywords:
WP; cost of capital; borrowing cost; investment; Capital flows; Financial Development; Developing Countries; domestic credit; net capital inflow; GDP increase; terms-of-trade index; net capital capital inflow; investment estimation; Capital inflows; Domestic credit; Exports; Return on investment; Export performance; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund