Growing Up with Capital Flows

31 Pages Posted: 28 Mar 2006

See all articles by Ashoka Mody

Ashoka Mody

International Monetary Fund (IMF) - Research Department

Antu Panini Murshid

University of Wisconsin - Milwaukee - Department of Economics

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Abstract

We examine the capital flows-domestic investment relationship for 60 developing countries from 1979 to 1999. In the 1990s, even as liberalization attracted new flows, foreign capital stimulated less domestic investment than in the preceding decade. With greater financial integration, governments accumulated more international reserves and domestic residents diversified by investing abroad. Foreign investors were also motivated by diversification objectives rather than by unmet investment needs. Inflows were channeled increasingly through portfolio flows - or through foreign direct investment with the characteristics of portfolio capital - resulting in weak investment stimulus. However, stronger policy environments strengthened the link between inflows and investment.

Keywords: Capital inflows, domestic investment, international financial integration

JEL Classification: F21, F30

Suggested Citation

Mody, Ashoka and Murshid, Antu Panini, Growing Up with Capital Flows. Journal of International Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=576322

Ashoka Mody

International Monetary Fund (IMF) - Research Department ( email )

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Antu Panini Murshid (Contact Author)

University of Wisconsin - Milwaukee - Department of Economics ( email )

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