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Does Financial Sector Development Augment Cross Border Capital Flows?

Abhijit Sen Gupta and Pragya Atri

MPRA Paper from University Library of Munich, Germany

Abstract: The sharp increase in volatility of capital flows in recent years has resulted in many countries altering the regulations governing the ow of foreign capital only to find such changes having a limited impact. We postulate that one reason for the limited effectiveness of such changes in regulations is the level of financial sector development in the country. As a country enhances its level of financial sector development, it also develops more and more sophisticated financial instruments. The more advanced the domestic financial instruments are, and the deeper is the integration of the domestic financial markets with the world markets, the greater is the likelihood of developing strategies to bypass capital account management measures. In this paper, we undertake various empirical techniques to identify the impact of financial sector development on capital flows, accounting for regulatory regime. The empirical results indicate that there is a threshold effect in the financial sector development capital flow relationship. In particular, financial sector development augments greater integration with global capital flows only above a threshold level. Below the threshold level we find financial development reduces the extent of integration with global capital markets.

Keywords: Capital Flows; Financial Sector Development; Macroeconomic Management (search for similar items in EconPapers)
JEL-codes: E52 F36 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2017-12
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Related works:
Journal Article: Does Financial Sector Development Augment Cross-Border Capital Flows? (2018) Downloads
Working Paper: Does Financial Sector Development Augment Cross Border Capital Flows? Downloads
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