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What drives international financial flows? Politics, institutions and other determinants

Journal

Journal of Development Economics

Subject

Economics

Publishing details

Journal of Development Economics 2009 March Vol 88:2 p 269-281

Authors / Editors

Papaioannou E

Biographies

Elias Papaioannou

Publication Year

2009

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 [Lucas, Robert E. 1990. “Why Doesn't Capital Flow from Rich to Poor Countries?” American Economic Review (Papers and Proceedings), 80 (2): 92–96. 1990] paradox of why doesn't capital flow from rich to poor countries. The analysis also does a first-step towards understanding which institutional features affect international banking

Keywords

Capital flows; Institutions; Law and finance; Politics; Banks; International finance

Available on ECCH

No


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