Abstract:

The effect of controls on international capital flows on domestic investment is one of the controversial issues in the literature. This paper investigates the relationship for six developed countries using an empirical investment model motivated by the neoclassical flexible accelerator model. Covered interest rate differentials are used to generate a measure of international capital controls. The instrumental variables approach is employed to wipe out the effects of the lagged dependent variable in the regressions. The results obtained from both the fixed-effect panel data version of the model and the individual time-series version of the model suggest that controls on international capital flows had no effect on domestic investment.

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