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

May 1, 2012

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Nikola Spatafora, and Oana Luca. Capital Inflows, Financial Development, and Domestic Investment: Determinants and Inter-Relationships, (USA: International Monetary Fund, 2012) accessed November 21, 2024

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.

Subject: Balance of payments, Capital inflows, Domestic credit, Export performance, Exports, International trade, Money, National accounts, Return on investment

Keywords: Borrowing cost, Capital flows, Capital inflows, Cost of capital, Developing Countries, Domestic credit, Domestic credit, Export performance, Exports, Financial Development, GDP increase, Global, Investment, Investment estimation, Net capital capital inflow, Net capital inflow, Return on investment, Terms-of-trade index, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/120
Stock No:

WPIEA2012120
ISBN:

9781475503494
ISSN:

1018-5941

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