The long-term vs.

short term
impact of International
Capital Flow on Economic
Growth

Abstract
The nancail crisis has sparked new life into the debate of benets
and costs of international capital mobility. This panel data analysis
of the eects of long- vs. short-term capital ows shows both benets
and costs of the capital mobility. Strong evidence for both the benets
and costs where found, but they are however shadowed by endogeneity
problems.
Arnar Einarsson 221180-3145
M.Sc. Advanced Economics and Finance

13. may 2011

Teachers: Paul Duo Deng

&

Niels Johannesen

Global Firm
Department of Economics
Copenhagen Business School

Contents
1 Introduction

2 Methodology

2.1

Independent Thoughts . . . . . . . . . . . . . . . . . . . . . .

2.2

The Ideal Dataset . . . . . . . . . . . . . . . . . . . . . . . . .

2.3

Structural Equation

. . . . . . . . . . . . . . . . . . . . . . .

3 Data

4 Results

4.1

Main Results

4.2

Selecting Volatility Measures

. . . . . . . . . . . . . . . . . . . . . . . . . . .

4.3

Separating Short- and Long-term Debt for Developing Economies 10

4.4

Robustness Check

. . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . .

5 Conclusions and Further Work

8
10
10

13

5.1

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

5.2

Further Work: The role of Interest Rates . . . . . . . . . . . .

13

A Summary Statistics

16

1 Introduction
Much of the discussion in global economics on globalization deals with the
importance of, international capital mobility. That is, the much-debated benets and costs of international capital mobility. The two main benets from

capital market integration are generally thought to be the geographically

unconstrained mobility of funds, that induces investments, and the diversication of risk involved in nancial transactions. The latter argument has
weakened signicantly after the nancial crisis of 2008, sparking new re into
this much-debated topic. The main costs being increased nancial fragility,
currency instability and limitations of independent national policies to deal
with those problems. These nancial instabilities, refer to the business cycle
and currency instability to the nancial meltdowns in east-Asia and Latin
America in the nineteens. Which has then lead to capital controls in parts
of Latin America.

1 These issues all have their fair share of literature.

This panel data analysis estimates the eect of short-term capital ow and
its volatility on economic growth. By separating the impact of FDI, the long
term impact, and of short term capital ow, STF, some proof of the benets
and costs of capital market integration are expected to be realized. The benets would be a positive eect of STF and a negative eect of the volatility
of STF. Dierent volatility measures where tried, with the maximum past
absolute dierence serving as the best measure for volatility. The analysis is
subjected to dierent kinds of endogeneity problems, making it dicult to
prove causal eects.
The rest of the paper is structured as follows; Section 2 introduces the
methodology, discussing the theoretical aspects of what drives growth and
an the ideal dataset for this analysis. Section 3 describes the data. Section 4
presents the results and Section 5 concludes and introduces some ideas for
further work.

2 Methodology
2.1

Independent Thoughts

Considering the causal eects of economic growth there seems to be an unobserved factor driving economic growth that is potentially stronger than any
eect of STF and even FDI. Intuitively it is the exploitation of resources, natural, technological and human, that are the main forces of economic growth.
Together with proper institutions both formal and informal institutions, eco1

See Welch (1996),Broto et al. (2011) and Crdenas and Barrera (1997)

nomic growth could be explained by

y f (N R, T R, HR, F I, II)

(1)

where NR, TR, HR are the natural, technological and human resources, respectively, and FI and II are formal and informal institutions respectively.
Given that there are some resources to be exploited and that the economies
internal institutions are satisfactory, FDI and then STF will follow. The
formal institutions are the quality of executive, legislative and judicial government or simply country and corporate governance. Informal institutions
could be the level of corruption and civilization. Other factors, such as the
openness of the economy, and the level of redistribution of wealth that the resources generate to the citizens can also be thought of as institutions. There
are dierent pre-requisitions for foreign identities to engage in FDI, debt,
and portfolio investments respectively;

FDI

: Given that there exists some property rights and foreign invest-

ments are protable, MNEs will put in a lot of eort to reach their
goals.

Debt

: Given that their exists some bankruptcy protection regulations

and there is large likelihood of enforcement, creditors will engage in

lending. Furthermore, that the economy is not subjected to Stiglitz
and Weiss (1981) credit rationing.

Portfolio Investments

: Given that there is a suciently high level

of Corporate Governance, that the expected return is higher that other

business opportunities investors will pursue their investments
In terms of informational asymmetries FDI has the lowest barrier to breach,
the only requirement MNEs have, is a guarantee that prots can somehow be
transferred out of the economy. This gives MNEs that operate in corrupted
economies a dilemma, as they might bribe the current authorities and thus
have interests in status quo, while they might also benet from a decrease in
corruption. A good example of this is the great interest western economies
have in the political stability in the middle-east, as an example the Italian
economy heavily integrated into the Libyan economy and are greatly dependent on oil from Libya.
From the same perspective Debt is more likely to be adopted earlier in developing economies than portfolio investments. It is though an important
idea to consider that nancial intermediaries prefer ST debt over LT debt,
especially in the emerging markets, as there is less risk involved in short term
agreements.

2 This is not particularly good for newly opened economies as

Furthermore, there is an incentive in the Basel II agreement that calls for lower capital
requirements on short term debt than long term debt.

they will be overooded with ST debt, with then increasing probability of

self-fullling liquidity crisis as soon as renancing fails.

As all resources require some investments it is a vital component of economic

growth. Considering only the investments part of the right side, the relation
to growth can be written as,

y F DI + Investments

(2)

where the Investments are internal investments that might require some
external nancing

Investments Internal(F unds+Equity+Debt)+External(Equity+Debt)

(3)
The literature is more interested in the emerging markets which is more
heavily dependent on the external factor for investments. Considering only
the external factors and separating the debt into short-term and long-term
loans.

y F DI + Portfolio
|

Investments

{z

ST F

+ ST

Debt

+LT

Debt

(4)

Hypothesizing that all the key factors of economic growth has been identied
the relationship should be explained by the sum of those factors and sum of
all possible interactions of

y f (N R, T R, HR, F I, II, F DI, ST F, LT

Debt)

(5)

It is very interesting to see the hypothetical relationship between economic

growth and LT debt. It is easy to imagine how LT debt could induce investments and thus economic growth, but it is also important to note that this
is an inverse U-shaped relationship, as to heavy debt would have negative
eect on the economy.

2.2

The Ideal Dataset

From the discussion of the previous section the ideal dataset could be described as follows. The duration of the data would depend on data availability, but one of the most interesting period would be from 1990 to date
due to the tequila crisis, Latin America crisis and the East Asia crisis. The
current crisis or the crisis of 2008 would be of special interests as it is an
perfect example of the Rodrik and Velasco (1999) short-term debt model,
but maybe more interestingly it was caused by external events.
According to Brakman et al. (2006) the global capital ow picked up, after
the Bretton Woods regime collapsed, in 1973 after a slump in the inter-war
3

See for example Rodrik and Velasco (1999).

4

and post-Second World War periods. The most recent data are probable from
2009, so the desired data period is from 1970 to 2009. All variables should
preferable be indexes or in relative scales to lower the bias due to dierent
sizes and shapes of the economies. All data should comply to the same rules
regarding things like currency, current prices and per capita adjustments.
Similarly, as the dependent variable is a growth variable, preferable some of
the independent variables should also be growth variables. Following is a list
of desirable variables:

Dependent Variable
-

Economic output, GDP or some other economic prosperity factors

Independent Variable
-

ST F

F DI

RD

RES

Bank Reserves

IN T

Interest Rates

DEBT

some measure for short term capital ow as a ratio of GDP

Investments as a ratio of GDP

Foreign Direct Investment as a ratio of GDP

Labour force
Education as a proxy for human capital
R&D spending as a proxy for technology capital

National + Private Debt

Formal Institutions
-

CRI

OP EN

Capital Restrictions Index

Market Openness, proxied as a sum of imports and exports as

a ratio of GDP
-

AN T I

CRED

EF JS

Indicator of Shareholder Rights

Indicator of Creditor Rights
Measure of Eciency of the Judicial System

Informal Institutions
-

CP I

Corruption Perception Index

MR

Murder rate as a ratio to population as a proxy for corruption

and civilization
This list of variables is largely inspired by the related literature but some
of them are self-inspired. As this analysis is subjected to a limited time

framework only a fraction of the most appropriate variables was collected.

The full list of variables and their sources can be seen in Section 3

2.3

Structural Equation

The following structural equation is proposed:

yi,t = 0 +1 F DIi,t +2 ST Fi,t +3 V ST Fi,t

+4 ki,t +5 li,t +6 hi,t +Dt +Di +i,t
(6)

yi,t = ln (yi,t /yi,t1 ),

i is for country level and t is time. The variables of
interest are the F DI , ST F and V ST F the volatility measure of STF. Other

Where the dependent variable is the economic growth

where the subscript

important variables are, k investments, l labour force, h human capital.

Then there are time dummies,

Dt ,

and country dummies,

Di .

The sample

will be divided into two sub-samples of industrial economies and developing

economies. The volatility will be measured as

ST Ft

1
1
=
kST Ft k =
n1
n1

n
X

!1

|ST Ft ST Ft1 |

t=2

where the lambda parameter is deciding the norm of deviations.

(7)

4 The rst

norm used by Petroulas (2004) is simple the average absolute dierence in

STF between years. The second norm is the geometric one i.e. the average
squared dierence of STF. The innite norm is then the maximum absolute
dierence of STF over the measuring period. Then the standard measure of
volatility as frequently used in nance is used as a benchmark. The standard
measure would overestimate the volatility as there are frequently trends in
the STF.
Growth of FDI, STF and investments K is then calculated in the same way
as the economic growth, i.e.

k = ln (kt /kt1 ).

Considering the signs of coecients, investments are necessary for exploitation of resources so positive signs are thus expected for investments and FDI.
The signs on STF and VSTF are subjected to more uncertainty as it is not
suspected that their eect is homogeneous for all countries. As the STF is
constructed from portfolio debt, it consist of Equity, ST and LT Debt for
most of this analysis. Consider the eect of each factor separately. The effects of LT Debt is inverse-U-shaped, there is essentially some economies that
are too indebted such that there is some mixed eects in STF. Unless these
too indebted economies are controlled for the eect of STF will be underestimated. ST debt is positive until some indebtedness level where it would drop
signicantly to a negative level. Then there is the eect of equity is cyclical
4

The i subscript has been dropped for a more clarifying equation.

6

with a positive trend. Busts in the equity market could spark the eect of
ST debt to change from positive to negative. Summing up all these factors
STF is expected to have a positive sign in general. The volatility, VSTF, is
expected to have a negative sign, as volatile equity and debt markets would
be very undesirable for all markets.

3 Data
This Panel data analysis is mostly based on the updated and extended  Ex-

ternal Wealth of Nations  (EWN II) dataset constructed by Lane and MilesiFerretti (2007). The dataset contains accumulated stocks of foreign assets
and liabilities for 67 industrial and developing countries. Short-term ow,
STF, is constructed by using four reported variables; Debt liabilities, Port-

folio Equity Liabilities, Financial Derivatives Liabilities, Other Investments

Liabilities.
The sample is divided into two sub-samples of industrial and developing
countries following the same procedure as in Lane and Milesi-Ferretti (2001):

Industrial countries

include the United States, United Kingdom,

Austria, Belgium, Luxembourg, Denmark, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, Canada, Japan, Finland, Greece,
Iceland, Ireland, Portugal, Spain, Australia and New Zealand.

Developing countries are Turkey,

South Africa, Argentina, Bolivia,

Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador,

El Salvador, Guatemala, Mexico, Panama, Paraguay, Peru, Uruguay,
Venezuela, Jamaica, Trinidad and Tobago, Israel, Jordan, Kuwait, Oman,
Saudi Arabia, Syrian Republic, Egypt, Sri Lanka, Taiwan, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Thailand,
Algeria, Botswana,Cte d'Ivoire, Mauritius, Morocco, Zimbabwe, Tunisia,
and China.
Furthermore data on investments as a ratio to GDP is collected from Heston
et al. (2011) along with sum of import and exports as a ratio to GDP, as
a measure of market openness. The labor force as a ratio to population and

gross enrollment to secondary school was collected from The World Bank
(2011). High quality labor force and schooling data where hard to nd and
those variables where excluded for most of the analysis due to the lack of
data quality.

4 Results
4.1

Main Results

To construct the main foundation for this analysis the following regressions
1.

y F DI + ST F + V ST F

2.

y F DI + ST F + V ST F + k + l + h + q

3.

y F DI + ST F + V ST F + k + q

4.

y F DI + ST F + V ST F + k + q + Dt

5.

y F DI + ST F + V ST F + k + q + Di + Dt

Where

for

Dm = {0, 1}
for

Dm = {0, 1}
for

Dm = {0, 1}

Dm = {0, 1} represents the sub-samples for developing

and industrial

economies, respectively. The results are reported in Table 1. For the rst
regression only the variables of our greatest interest are included. As expected
the FDI and STF have positive values, while the volatility has a negative
value. The second regression contains the full model, where investments are
strongly signicant while the market openness and and the labor force are
not signicant. Education is then signicant but has opposite sign to what
was expected.

5 Education and labor force variables are dropped for the rest

of the analysis. In the third and fourth regressions the same regression model
is applied on sub-samples of industrial and developing countries.
Interestingly the volatility of STF is greater for the industrial economies
and it is not even signicant for the developing economies. An possible explanation for this is that both large positive and negative volatilities are
considered in the measure and they would have positive and negative eects
on the economies, respectively. Newly opened economies would be subjected
to a large inux of capital so it is maybe not so surprising that the coecient is not signicant. The result for the industrial economies are though
compelling as shocks are noticed and result in less growth.
In regressions ve and six time dummies have been included, making the signicance of most coecients drop signicantly. The most interesting result
is the loss of signicance the investments of the developing economies experiences. This indicates that investment level in those economies has a common
trend with the economic growth. Including time dummies removes the common trends. Regressions seven and eight are xed-eects models with time
and country dummies. This highly controlled model still shows that FDI and
STF are important variables and show strong consistency. The same goes for
the VSTF of the industrial economies.
5

The reason is probable due to the low quality of data, gross intake into secondary
school is probable highest in the developed slow growth economies. Furthermore, the
reported number of observations is a bit exaggerated, as missing observations in middle
of time series were tted by interpolation.
8

Table 1: Results for the main analysis. The dependent variable is the log of economic growth measured as a rst dierence of GDP.
The independent variables are the log of growth in FDI, STF and investments lKid. Other independent variables are Market openness,
openk, education, Edu, and labor force Empl.

lFDIldg

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

OLS1

OLS2

OLS31

OLS30

OLS41

OLS40

FE51

FE50

0.106

(2.63)
lSTFdg

0.321

(9.71)
infVSTF

0.101

(2.67)
0.314

0.460

(8.60)

(-1.57)

(-2.43)

0.126

0.170

0.243

0.127

-0.000163

(-2.33)

0.149

0.137

(3.69)

-0.0193

0.824

(4.53)

(3.17)

-0.00276

0.0809

(2.33)

(2.77)

-0.000307

(-0.28)

0.0230

(-0.30)

(3.75)

-0.0000220

(6.35)

(-3.25)

(4.18)

Empl

-0.0406

0.939

(5.51)

(7.40)

-0.0219

openk

(2.76)

-0.0122

lKdg

0.0541

-0.00235
(-0.27)
0.0559

0.0220

(2.30)
0.118

(2.43)

-0.0266

(-2.94)
0.150

0.908

(4.62)
0.133

(3.04)
-0.0120
(-1.11)
0.0542

(3.82)

(1.93)

(4.58)

(1.34)

0.0000790

-0.000105

0.000319

-0.000124

(-4.02)

(-2.34)

(1.30)

(-1.69)

(1.15)

(-0.75)

0.00970
(0.48)

Edu

-0.000487
(-5.20)

Time Dummy

No

No

No

No

Yes

Yes

Yes

Yes

Country Dummy

No

No

No

No

No

No

Yes

Yes

Sample

Full

Full

Industrial

Developing

2298

1892

783

1486

783

1486

783

1486

0.0571

0.0974

0.174

0.104

0.700

0.237

0.706

0.242

R2

t statistics in parentheses
Statistical signicant levels:

p < 0.05,

p < 0.01,

p < 0.001

4.2

Selecting Volatility Measures

Several dierent volatility measure as discussed in Section 2.3. The most

signicant results can be viewed in Table 2. The innite norm or simple the
maximum absolute dierence in STF is the variable having the greatest t
and was thus selected as a volatility measure. The speciality of the innite
norm is that a great shock would be the largest dierence until their is either
a greater shock or the observation is dropped from the sample. This lets the
innite norm make up for some lagged eects of the shock. A combination
of the dierent measures was also tried without improvements. Furthermore,
an similar measure to the innite one, would be to consider only the negative
shocks, that is selecting the minimum value of real dierences in STF. This
was tried out without giving a signicant result, but might be worth some
further analysis.

4.3

Separating Short- and Long-term Debt for Developing

Economies

The World Bank (2011) has data available on Short-term debt as a ratio of
total debt is available for developing economies in their open database. This
allows for more in deep analysis of the eects of separating the ST and LT
debt for developing economies. An subset of the developing countries of the
developing nations having the greatest growth is created to see if there is
some signicant dierence between high growth economies and lower growth
economies.

6 The results can be seen in table 3.

The rst regression shows that FDI and STF have positive eects and more
interestingly VSTF and LTD are strongly negative. This can be interpreted
as a strong support for the hypothesis that volatility of truly short-term
capital ow has negative eect on growth.

7 The strong negative eect of

Long-term debt is quite repelling and makes debt forgiveness make a whole
lot more sense. Debt forgiveness would though reduce the possible exploitation of cheap resources, so that would not be in the interest of the rich
creditors.

4.4

Robustness Check

Robust standard errors are used in all regressions without giving signicantly
dierent t -statistics. The problem of the results in Section 4.3 is the possible relationship that VSTF is signicant as it is making up for some lagged
6
Growth economies being: Brazil, China, India, Lithuania, Mexico, Nigeria, Russia and
Turkey
7
Note that the STF in the rst analysis is not really only short-term capital ow as it
also contains the long-term debt.

10

Table 2: Dierent Volatility Measures

lFDIldg

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

OLS11

OLS10

OLS2p1

OLS2p0

OLSi1

OLSi0

OLSs1

OLSs0

0.222

0.986

(2.81)
lSTFdd

0.421

0.183

0.432

0.147

-0.000425

0.182

11

(-2.15)

0.0541

0.245

0.147

0.460

0.170

(-3.17)

-0.000184
(-2.44)

-0.000307

0.243

(-4.02)

-0.000163
(-2.34)

-0.137

0.183

-0.000428

(6.25)

(3.70)

0.245

0.147

(5.75)

(-3.17)

-0.000183
(-2.43)

-0.0183
(-0.49)

kV ST F k

-0.0406

(-3.25)

-0.00276
(-0.30)

V ST Fstandard

R2

(5.35)

(6.15)

(-0.33)

(-2.86)

0.427

(2.77)

0.985

(2.81)

0.0809

-0.00698

kV ST F k2

Sample

0.222

(6.35)

(3.75)

0.939

(5.51)

(7.40)

(5.75)

(2.76)

(6.24)

-0.000427

(5.35)

(3.70)

(-2.45)

-0.0633

-0.000186

0.985

(6.28)

(5.75)

(-3.15)

kV ST F k1

0.244

(2.79)

(6.23)

(3.72)
openk

0.219

(5.35)

(6.04)
lkid

-0.126
I

-0.0225

(-2.62)

(-0.60)

666

1258

666

1258

783

1486

666

1258

0.177

0.143

0.180

0.143

0.174

0.104

0.179

0.143

statistics in parentheses
Statistical signicant levels:
t

p < 0.05,

p < 0.01,

p < 0.001

Table 3: Dividing the portfolio debt into short-term debt and long-term debt.

lFDIldg

lSTFdgs

lLTDd

(1)

(2)

(3)

(4)

(5)

OLS

OLS1

OLS0

FE1

FE0

0.608

0.509

0.551

0.486

(5.24)

(3.55)

(4.50)

(4.09)

(3.45)

0.00611

0.0143

0.00314

0.00748

0.000981

(1.79)

(1.77)

(0.96)

(0.99)

(0.29)

-0.541

(-13.49)
infVSTFs

-0.0557

-0.644

(-12.97)
-0.170

(-4.81)
lkid

openk

Time Dummy
Country Dummy
Sample

0.0738

(-4.38)
0.259

-0.484

(-9.66)
-0.0445

-0.696

0.491

-0.552

(-9.58)

(-7.89)

-0.0173

-0.00382

(-4.44)

(-0.64)

(-0.55)

0.0380

0.160

0.0190

(2.91)

(4.78)

(1.49)

(3.68)

(0.65)

-0.000139

-0.000148

0.00000850

-0.000316

(-1.51)

(-1.10)

(0.07)

(-1.24)

(2.18)

No

No

No

Yes

Yes

0.000637

No

No

No

Yes

Yes

Devel.

H.Growth

L.Growth

H.Growth

L.Growth

1275

348

927

348

927

R2

0.533

0.726

0.455

0.833

0.623

statistics in parentheses
Statistical signicant levels:
t

p < 0.05,

p < 0.01,

12

p < 0.001

eects. That makes it necessary to solve the endogeneity problem caused by

the autocorrelation of economic growth. Introducing lagged variables should
solve most of this problem, the results can be seen in Table 4. The rst regression show that the rst two lagged terms of investments is signicant and
the rst lagged term for STF. This however makes the VSTF insignicant.
As the strongest negative signicance of VSTF was observed in the special
analysis introduced in Section 4.3 the separated ST and LT debt is used in
the same lagged model as in the rst regression. It is clear that this result
undermines the previous results that there is a positive eect of STF and
a negative eect of VSTF. Regressions four and ve are xed eects with
lagged variables and show a positive eect for STF and positive and negative
eects for VSTF. This mismatch in results clearly calls for further analysis
of this topic, as it might still be bit of an overstatement, stating that there is
no sign of STF and VSTF having positive and negative eects, respectively.
The variable for market openness has been unstable for most estimation
equations and would need to be revised so that it would give better results.
It is also important to account for the productivity of labour. As excluding
these variables causes endogeneity problems of omitted variable bias.

5 Conclusions and Further Work

5.1

Conclusions

The stable positive eect of STF should strengthen the arguments for capital
market integration for the global economy. Whereas, the negative eect of
VSTF is an argument against capital market integration. The strong negative
eect of long-term debt shows the importance of debt forgiveness for developing economies. The endogeneity problems raised in the previous section
calls for further analysis of this problem in order to get decisive conclusions.

5.2

Further Work: The role of Interest Rates

Another interesting case is the direct or not so direct eect of interest rates.
After really high interest rates in the late seventies and the early eighties the
fed lowered interest rates to its lowest level in 20 years of 3 percentage in late
1992. That would for sure have made funds cheap and easy to borrow, and
opened up new markets that might have been subjected to Stiglitz-Weiss
credit rationing earlier. All the nancial crisis in the nineteen nineties have
similar symptoms, that is there is an increase in STF and then a sudden
decrease, where the banks and rms are having problems in renancing their
short term debt, probable causing severe problems to the economies.

13

Furthermore, it is interesting to review that the interest rates where lowered

to extremely low rates after the internet bubble of 2001, making a perfect
setting for a global housing and credit bubble. After bursting of that bubble
in 2008 it is quite remarkable to see the cure applied by the economic doctors
of the world, as the interest rates were lowered even further. This has given
the credit strained economies incentives to increase their debt.

8 This interest

is greatly due to the recent debate over the way the nancial crisis was
handled by the world leading economies.

It would be interesting to test an hypothesis that low interest rates cause

nancial meltdowns or to see if stocked ST debt could serve as a predictor
for nancial crisis. The idea behind stocked ST debt is that for long term
investments that are nanced with ST debt, renancing will be dicult. To
clarify the idea further, creditors are likely to prefer short term debt to long
term debt as their is less uncertainty for ST debt. Now consider an economy
investing in some long term projects and need nancing the only available
loans are ST, thus the demand for ST debt should pile up as there is constant
desire to invest and older ST debt needs renancing.

8
9

It is like curing a disease with the disease

Referring to Keynes vs. Austrian perspectives of Business Cycle Theories.
14

Table 4: Robustness Checks

lFDIldg

(1)

(2)

(3)

(4)

(5)

OLS

OLS

OLS

FE

FE

0.104

1.329

(3.72)
lSTFdd

0.771

(7.29)

(4.47)

0.267

(6.91)
infVSTF

lkid

openk

(3.17)

(4.54)

0.0810

0.123

(1.79)

(2.29)

0.0318

0.00347

-0.00570

0.0133

(1.69)

(0.35)

(-1.09)

(1.92)

0.146

0.613

0.106

0.0676

(6.80)

(1.73)

0.0874

0.00971

0.297

0.0756

(6.59)

(1.41)

0.0213

0.0105

(0.88)

(0.25)

0.0822

(0.16)

(2.10)

(1.62)

(3.81)

0.0681

0.0487

0.0106

0.0429

(2.52)

(1.00)

(1.51)

(0.34)

(2.11)

-0.00000634

-0.0000860

-0.0000492

0.000366

-0.000255

(-0.12)

(-0.52)

(-0.37)

(1.86)

(-1.33)

0.000494

-0.000647

(0.18)

(-0.50)

0.0607

lSTFdgs

lLTDd

-0.0577

-0.0449

(-3.19)
L.lSTFdgs

-0.00515

0.0688

(-5.71)

-0.00202

(-2.38)

(-1.70)

S Time Dummy

No

No

No

Yes

Yes

Country Dummy

No

No

No

Yes

Yes

Full

H.Growth

L.Growth

Sample

0.0792

(3.00)
L2.lkid

0.892

(0.79)

(2.78)
L.lkid

0.00487

(4.21)
L.lSTFdd

0.0353

2147

742

1405

742

1405

r2

0.0957

0.710

0.249

0.716

0.256

t statistics in parentheses
Statistical signicant levels:

p < 0.05,

p < 0.01,

15

p < 0.001

A Summary Statistics
Table 5: Summary statistics of economic growth measured as the rst dif-

ference of GDP. The sample consists of 67 countries over a 37 year period.

Resulting in a total of 2442 usable observations.

Country

mean

sd

min

max

Algeria

1.09

0.13

0.75

1.29

Argentina

1.11

0.31

0.36

1.73

Australia

1.09

0.11

0.89

1.42

Austria

1.10

0.12

0.87

1.42

Belgium

1.09

0.12

0.83

1.39

Bolivia

1.08

0.13

0.93

1.71

Botswana

1.15

0.16

0.91

1.51

Brazil

1.11

0.17

0.70

1.59

Canada

1.08

0.07

0.97

1.22

Chile

1.10

0.17

0.65

1.37

China

1.11

0.11

0.86

1.30

Colombia

1.09

0.12

0.88

1.41

Costa Rica

1.10

0.12

0.54

1.27

Cote d'Ivoire

1.08

0.15

0.75

1.37

Denmark

1.09

0.12

0.87

1.41

Dominican Republ

1.10

0.18

0.44

1.57

Ecuador

1.11

0.17

0.72

1.51

Egypt. Arab Rep.

1.10

0.17

0.50

1.43

El Salvador

1.08

0.12

0.73

1.52

Finland

1.09

0.13

0.79

1.32

France

1.09

0.12

0.88

1.39

Germany

1.09

0.13

0.84

1.43

Greece

1.09

0.10

0.90

1.31

Guatemala

1.09

0.10

0.76

1.26

Iceland

1.11

0.14

0.85

1.38

India

1.08

0.08

0.88

1.26

Indonesia

1.12

0.19

0.44

1.51

Ireland

1.12

0.10

0.93

1.34

Israel

1.10

0.12

0.77

1.39

Italy

1.09

0.12

0.80

1.42

Jamaica

1.07

0.15

0.74

1.38

Japan

1.09

0.14

0.88

1.48

Jordan

1.10

0.12

0.67

1.31

Kuwait

1.10

0.22

0.59

1.84

16

Table 5: (cont.) Summary statistics of economic growth measured as the rst

dierence of GDP. The sample consists of 67 countries over a 37 year period.

Resulting in a total of 2442 usable observations.

Country

mean

sd

min

max

Luxembourg

1.11

0.13

0.82

1.46

Malaysia

1.11

0.12

0.72

1.42

Mauritius

1.10

0.11

0.92

1.34

Mexico

1.11

0.17

0.68

1.40

Morocco

1.09

0.11

0.81

1.32

Netherlands

1.10

0.12

0.84

1.39

New Zealand

1.09

0.13

0.82

1.33

Norway

1.10

0.09

0.92

1.30

Oman

1.13

0.17

0.79

1.59

Pakistan

1.08

0.12

0.58

1.35

Panama

1.08

0.07

0.86

1.25

Paraguay

1.11

0.18

0.68

1.49

Peru

1.09

0.19

0.70

1.65

Philippines

1.09

0.11

0.80

1.40

Portugal

1.10

0.12

0.88

1.39

Saudi Arabia

1.13

0.19

0.83

1.56

Singapore

1.14

0.12

0.86

1.53

South Africa

1.08

0.15

0.76

1.50

Spain

1.11

0.14

0.84

1.38

Sri Lanka

1.07

0.10

0.67

1.26

Sweden

1.08

0.12

0.76

1.32

Switzerland

1.09

0.13

0.87

1.43

Syrian Arab Repu

1.11

0.17

0.51

1.41

Thailand

1.11

0.11

0.74

1.33

Trinidad and Tob

1.09

0.13

0.64

1.36

Tunisia

1.09

0.11

0.80

1.40

Turkey

1.11

0.16

0.72

1.41

United Kingdom

1.09

0.10

0.89

1.30

United States

1.07

0.03

1.03

1.13

Uruguay

1.09

0.18

0.55

1.44

Venezuela. RB

1.08

0.16

0.73

1.35

Zimbabwe

1.11

0.36

0.34

2.40

Total

1.10

0.15

0.34

2.40

Source:

ewnii6.dta

17

Table 6: The mean of the main independent variables, the volatility measure

infVSTF with 2351 observations. The short-term ow STFdd with 2373 observations, FDI FDIldg with 2402 observations, investments as a ratio to GDP
ki with 2412 observations and market openness openk with 2412 observations.
Country
Algeria

infVSTF

STFdd

FDIldg

ki

openk

0.53

1.08

0.01

36.25

78.41

Argentina

0.27

1.11

0.00

20.86

27.00

Australia

0.41

1.17

0.02

22.46

29.34

Austria

0.46

1.19

0.02

23.02

67.30

Belgium

0.34

1.19

0.07

24.05

111.72

Bolivia

0.30

1.09

0.02

12.80

48.96

Botswana

0.42

1.12

0.04

40.59

99.14

Brazil

0.29

1.14

0.01

23.25

16.13

Canada

0.18

1.10

0.02

18.77

52.94

Chile

0.29

1.11

0.03

19.82

48.17

China

0.37

1.24

0.02

33.26

33.75

Colombia

0.40

1.12

0.01

20.61

28.34

Costa Rica

0.32

1.12

0.03

18.73

62.05

Cote d'Ivoire

0.53

1.16

0.01

10.26

77.04
60.71

Denmark

0.35

1.17

0.02

20.44

Dominican Republ

0.47

1.13

0.02

18.78

64.43

Ecuador

0.53

1.16

0.02

30.81

48.58

Egypt. Arab Rep.

0.57

1.13

0.02

20.71

74.81

El Salvador

0.34

1.14

0.01

14.21

44.36

Finland

0.45

1.16

0.02

24.36

50.32

France

0.24

1.16

0.03

20.03

35.49

Germany

0.35

1.17

0.01

21.29

44.96

Greece

0.27

1.18

0.01

23.74

36.93

Guatemala

0.26

1.13

0.01

16.78

57.16

Iceland

0.49

1.23

0.02

27.74

62.13

India

0.30

1.14

0.00

21.68

22.96

Indonesia

0.25

1.13

0.01

28.99

53.61

Ireland

0.45

1.24

0.07

23.20

88.44

Israel

0.32

1.13

0.01

25.56

65.31

Italy

0.42

1.16

0.01

22.97

41.51

Jamaica

0.37

1.10

0.03

24.27

91.23

Japan

0.63

1.19

0.00

30.76

18.03

Jordan

0.51

1.18

0.04

48.80

107.75

Kuwait

0.94

1.19

0.00

23.21

89.86

18

Table 6: (cont.) The mean of the main independent variables, the volatility
measure infVSTF with 2351 observations. The short-term ow STFdd with
2373 observations, FDI FDIldg with 2402 observations, investments as a ratio to GDP ki with 2412 observations and market openness openk with 2412
observations.

Country

infVSTF

STFdd

FDIldg

ki

openk

Luxembourg

0.17

1.15

2.83

23.05

221.92

Malaysia

0.64

1.20

0.03

31.93

135.10
125.62

Mauritius

0.53

1.15

0.01

32.10

Mexico

0.30

1.12

0.01

20.28

28.96

Morocco

0.40

1.13

0.02

32.01

47.71
85.34

Netherlands

0.32

1.17

0.04

19.12

New Zealand

0.36

1.18

0.03

18.73

42.17

Norway

0.41

1.18

0.02

25.80

64.19

Oman

0.89

1.24

0.01

27.11

90.96

Pakistan

0.27

1.10

0.01

21.18

33.42

Panama

0.76

1.17

0.04

20.32

158.08

Paraguay

0.46

1.13

0.01

22.63

83.43

Peru

0.35

1.10

0.01

21.80

31.45

Philippines

0.32

1.13

0.01

21.10

75.96

Portugal

0.34

1.18

0.02

25.78

44.32

Saudi Arabia

0.89

1.23

0.01

26.08

77.64

Singapore

0.38

1.23

0.11

42.83

328.80

South Africa

0.28

1.10

0.02

23.31

47.44

Spain

0.40

1.20

0.02

23.93

32.26

Sri Lanka

0.17

1.10

0.01

28.21

66.59

Sweden

0.43

1.18

0.03

18.18

59.49

Switzerland

0.30

1.15

0.04

26.31

62.68

Syrian Arab Repu

0.50

1.10

0.01

17.15

66.87

Thailand

0.36

1.17

0.02

35.81

89.58

Trinidad and Tob

0.48

1.13

0.06

26.89

121.94

Tunisia

0.42

1.13

0.05

43.83

97.12

Turkey

0.41

1.17

0.01

16.10

24.72

United Kingdom

0.36

1.18

0.02

15.28

38.96

United States

0.10

1.15

0.01

19.22

17.14

Uruguay

0.55

1.15

0.01

17.18

39.81

Venezuela. RB

0.52

1.14

0.01

21.10

50.98

Zimbabwe

0.40

1.14

0.01

18.88

47.92

Total

0.41

1.15

0.04

24.18

67.64

Source:

ewnii6.dta

19

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