What Drives International Financial Flows? Politics, Institutions and Other Determinants

Elias Papaioannou

No 7010, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (1990) paradox of why doesn?t capital flow from rich to poor countries. The analysis also does a first-step towards understanding which exactly institutional features affect international banking.

Keywords: Capital flows; Institutions; Law and finance; Politics; Banks; International finance (search for similar items in EconPapers)
JEL-codes: F21 F34 G21 K00 (search for similar items in EconPapers)
Date: 2008-10
New Economics Papers: this item is included in nep-cba and nep-law
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Citations: View citations in EconPapers (12)

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Journal Article: What drives international financial flows? Politics, institutions and other determinants (2009)
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