nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2006‒07‒28
two papers chosen by
Iulia Igescu
Global Insight, GmbH

  1. Private investment and financial development in a globalized world By Yongfu Huang
  2. On the determinants of external imbalances and net international portfolio flows - a global perspective By Roberto A. De Santis; Melanie Lührmann

  1. By: Yongfu Huang
    Abstract: Using recently developed panel data techniques on data for 43 developing countries over the period 1970-98, this paper provides an exhaustive analysis of causality between aggregate private investment and financial development. GMM estimation on averaged data, and a common factor approach on annual data allowing for global interdependence and heterogeneity across countries suggest positive causal effects going in both directions. The finding has rich implications for the development of financial markets and the conduct of macroeconomic policies in developing countries in an integrated global economy.
    Keywords: Private Investment, Financial Development, Global Interdependence, Common Factor Analysis, Panel Unit Root Test, Panel Cointegration Test
    JEL: F36 F41 E22 E44
    Date: 2006–07
  2. By: Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Melanie Lührmann (Institute for Fiscal Studies, 7, Ridgmount Street, WC1E 7AE London, United Kingdom.)
    Abstract: In a panel covering a large number of countries from 1970 to 2003, we show that net portfolio flows play an important role in correcting external imbalances, since they are driven by common determinants represented by countries’ demographic profiles, the quality of institutions, monetary aggregates and initial net financial asset positions. Population ageing causes current account deficits, net equity inflows and net outflows in debt instruments. A higher money to GDP ratio – associated with lower interest rates – favours international investments in domestic stocks to the detriment of the less attractive domestic bonds. Additionally, current account balances are driven negatively by real GDP growth, losses in competitiveness and increases in the quality of the institutions; net equity flows are driven positively by the quality of the institutions and negatively by per capita income; while net flows in debt instruments are driven by long-term interest rate differentials and deviations from the UIP. JEL Classification: F21, F32, F41, O16.
    Keywords: Current accounts, net portfolio flows, panel regressions.
    Date: 2006–07

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