International Capital Flows and the Lucas Paradox by Muhammad Akhtaruzzaman

Author:Muhammad Akhtaruzzaman
Language: eng
Format: epub
ISBN: 9789811390692
Publisher: Springer Singapore

(5.7)

(5.8)

Panel models (Eqs. 5.7 and 5.8) are estimated including the main variables of interest (i.e., the institutions index, ; capital account openness, ; and economic development, ) and the same standard set of controls ( are used for the cross-section analysis.

5.3 Fixed Effects (FE) Model Results

Table 5.1 reports FE estimation results. The institutions index does not completely solve the Lucas paradox, i.e., a significant positive correlation between GDP per capita and capital inflows persists (Model 2) even though country-specific characteristics are controlled for. Moreover, the panel FE estimates show capital account openness is a highly significant determinant of capital inflows and there is no identifiable impact of institutions if capital account openness is controlled for (Model 3). This suggests that more capital flows to the countries with relatively less capital account restrictions. This finding further suggests that foreign investors, and perhaps foreign direct investors in particular, are concerned about the convertibility restrictions of potential investment locations and prefer investment locations that offer relatively generous policies on capital account convertibility.Table 5.1Panel fixed effects analysis, N = 98 countries, 1984–2015

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