Opening Up: Capital Flows and Financial Sector Dynamics in Low-Income Developing Countries

Sebastian Horn and Futoshi Narita

No 2021/237, IMF Working Papers from International Monetary Fund

Abstract: Over the past two decades, many low-income developing countries have substantially increased openness towards external financing and have received large capital inflows. Using bank-level micro data, this paper finds that capital inflows have been associated with financial deepening through increases in bank loans, deposits, and wholesale funding. Domestic banks increase loans more than foreign banks. There are only modest signs of a build-up in financial vulnerabilities. Causality is examined through an instrumental variable approach and an augmented inverse-probability weighting estimator. These approaches indicate only limited evidence for global push effects, pointing towards the importance of domestic pull factors.

Keywords: micro data; low-income developing countries; U.K.'s Foreign; Commonwealth and Development Office; research project; bank characteristic; Capital inflows; Capital flows; Loans; Financial statistics; Financial sector risk; Global (search for similar items in EconPapers)
Pages: 49
Date: 2021-09-24
New Economics Papers: this item is included in nep-fdg and nep-mon
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