What Drives International Financial Flows? Politics, Institutions and Other Determinants

41 Pages Posted: 18 Dec 2008

See all articles by Elias Papaioannou

Elias Papaioannou

Dartmouth College - Department of Economics

Date Written: October 2008

Abstract

This paper uses a large panel of financial flow data from banks to assess how institutions affect international lending. First, employing a time varying composite institutional quality index in a fixed-effects framework, the paper shows that institutional improvements are followed by significant increases in international finance. Second, cross-sectional models also show a strong effect of initial levels of institutional quality on future bank lending. Third, instrumental variable estimates further show that the historically predetermined component of institutional development is also a significant correlate of international bank inflows. The results thus suggest that institutional underdeveloped can explain a significant part of Lucas (1990) paradox of why doesn't capital flow from rich to poor countries. The analysis also does a first-step towards understanding which exactly institutional features affect international banking.

Keywords: banks, capital flows, institutions, international finance, law and finance, politics

JEL Classification: F21, F34, G21, K00

Suggested Citation

Papaioannou, Elias, What Drives International Financial Flows? Politics, Institutions and Other Determinants (October 2008). CEPR Discussion Paper No. DP7010, Available at SSRN: https://ssrn.com/abstract=1311134

Elias Papaioannou (Contact Author)

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

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