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Capital Inflows and Economic Growth: Does the Role of Institutions Matter?
Author(s) -
Slesman Ly,
Baharumshah Ahmad Zubaidi,
Wohar Mark E.
Publication year - 2015
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1514
Subject(s) - economics , equity (law) , index (typography) , foreign direct investment , portfolio , monetary economics , external debt , debt , macroeconomics , international economics , financial economics , world wide web , political science , computer science , law
Abstract Recent evidence shows that institutions figure prominently in explaining the ‘Lucas paradox’. Using a threshold regression model, we extend this evidence to a situation where institutions index the relationship between foreign capital inflows and economic growth. We find strong and robust evidence that portfolio equity (including foreign direct investment) and debt inflows have positive effects on growth only in countries with high‐quality institutions. Countries that fall below the threshold level of institutional quality record either insignificant or negative effects. This paper provides a possible explanation on the so‐called Lucas paradox. Copyright © 2015 John Wiley & Sons, Ltd.