Financial Restraints and Private Investment: Evidence from a Nonstationary Panel*

Panicos Demetriades, Mauro Costantini, Gregory James () and Kevin Lee ()

No 10/06, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We employ recently developed panel data methods to estimate a model of private investment under financial restraints for 20 developing countries using annual data for 1972-2000. We show that the qualitative nature of the results varies depending on whether we take into account cross-country effects. When we allow for cross-sectional dependence, investment displays more sensitivity to world capital market conditions and exchange rate uncertainty. A perhaps even more surprising result is the finding that countries that managed to suppress domestic real interest rates without generating high inflation enjoyed higher levels of private investment than those that would have been obtained under liberalized conditions.

Keywords: Financial Restraints; Private Investment; Nonstationary Panels; Cross- Sectional Dependence (search for similar items in EconPapers)
JEL-codes: G18 G28 O16 (search for similar items in EconPapers)
Date: 2010-01
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Related works:
Journal Article: FINANCIAL RESTRAINTS AND PRIVATE INVESTMENT: EVIDENCE FROM A NONSTATIONARY PANEL (2013)
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