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Private capital flows and economic growth in Africa: The role of domestic financial markets

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  • Agbloyor, Elikplimi Komla
  • Abor, Joshua Yindenaba
  • Adjasi, Charles Komla Delali
  • Yawson, Alfred

Abstract

This study examines the relation between private capital flows and economic growth in Africa during the period 1990–2007. We estimate the empirical relation with a panel Instrumental Variable Generalized Method of Moments (IV-GMM) estimator which allows for arbitrary heteroskedasticity and endogeneity. Decomposing private capital flows into its component parts, we find that foreign direct investment, foreign equity portfolio investment and private debt flows all have a negative impact on economic growth. Countries with strong domestic financial markets, however, benefit more by being able to transform the negative impact of private capital flows into a positive one. Private capital flows, thus, promote economic growth in the presence of strong domestic financial markets. These results suggest that strong financial markets are needed for private capital flows to impact economic growth positively. Our results are robust to the control of population size, savings, financial openness and institutional quality.

Suggested Citation

  • Agbloyor, Elikplimi Komla & Abor, Joshua Yindenaba & Adjasi, Charles Komla Delali & Yawson, Alfred, 2014. "Private capital flows and economic growth in Africa: The role of domestic financial markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 137-152.
    • Handle: RePEc:eee:intfin:v:30:y:2014:i:c:p:137-152
    DOI: 10.1016/j.intfin.2014.02.003
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    More about this item

    Keywords

    Africa; Capital flows; Economic activity; Financial markets;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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