This paper assesses the impact of capital inflows and their composition on the real exchange rate and economic growth in developing countries. Capital inflows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth through the appreciation of the real exchange rate. The researchers employ the Generalized Method of Moments (GMM) for dynamic panel data to deal with the endogeneity bias. Using a large sample of 77 low- and middle-income countries over the period 1980-2012, the results clearly show that capital inflows affect directly and indirectly economic growth.
This work is part of the ‘Financial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries’ project
Jean-Louis Combes, Tidiane Kinda, Rasman Ouedraogo, Patrick Plane (2017) Does It Pour When it Rains? Capital Flows and Economic Growth in Developing Countries . Fondation pour les études et recherches sur le développement international (FERDI) Working paper 157
Does It Pour When it Rains? Capital Flows and Economic Growth in Developing Countries
Published 1 February 2017