Financial flows and economic growth in developing countries |
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| Institution: | 1. Université Clermont Auvergne, CNRS, IRD, CERDI, F-63000 Clermont-Ferrand, France;2. IMF, Washington, USA;1. Faculty of Economics, Chulalongkorn University, Bangkok, Thailand;2. Department of Econometrics and Business Statistics, Monash University, Victoria, Australia;1. School of Economics and Management, Beihang University, Beijing, 100191, China;2. College of Business, University of Nevada, Reno, Reno, NV 89557, USA;1. Zhongnan University of Economics and Law, Wuhan, 430073, Hubei, China;2. Zhejiang University of Finance & Economics, Hangzhou, China;3. School of Economics and Management, China University of Geosciences, Wuhan, 430074, China;4. College of Economics and Management, Huazhong Agricultural University, Wuhan, 430073, Hubei, China;1. Universidad Catolica de Murcia, Avda. Los Jerónimos, 135, 30107 Murcia, Spain;2. Instituto Flores de Lemus, Spain |
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| Abstract: | This paper assesses the impact of financial flows and their composition on the real exchange rate and on economic growth for a sample of low- and middle-income countries over the period of 1980–2012. Financial flows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth through appreciation of the real exchange rate. We use the generalized method of moments (GMM) for dynamic panel. Results show that net financial flows affect economic growth both directly and indirectly: (i) a one percent increase in total financial flows appreciates the real exchange rate by 0.5 percent; (ii) the real exchange rate appreciation effect of remittances is twice the effect of aid and ten times greater than the effect of Foreign Direct Investments; (iii) financial flows stimulate economic growth regardless of the development level. An increase of $10 per capita financial flows leads to a gain of 0.08 points of annual growth. This gain amounts to 0.15 when we control for the negative impact of the real exchange rate. Instability of market-oriented flows, such as FDI and portfolio investments, exacerbates instability of the economic growth rate. |
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| Keywords: | Financial flows Real exchange rate dynamics Economic growth F3 F4 O4 |
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