Discussion Paper Details

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Title: Capital Flows and Institutions

Author(s): Deniz Igan, Alexandre Lauwers and Damien Puy

Publication Date: August 2022

Keyword(s): Capital Flows, Institutional dependence, institutions and Manufacturing

Programme Area(s): Development Economics and International Macroeconomics and Finance

Abstract: Consistent with an institutional quality channel of capital flows, we show that industries that are more dependent on ''good'' institutions grow relatively more after foreign capital flows into the private sector. The effects are stronger in countries further away from the institutional frontier, but they disappear and even turn negative in countries with very low institutional quality. Institution-dependent industries grow, however less when capital flows to the official sector. Our findings support the view that foreign investors can be, under certain conditions, a catalyst for institutional reform and that the relaxation of government budget constraints generally weakens structural reform incentives.

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Bibliographic Reference

Igan, D, Lauwers, A and Puy, D. 2022. 'Capital Flows and Institutions'. London, Centre for Economic Policy Research.