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Does institutional quality affect capital mobility? Evidence from developing countries

Published online by Cambridge University Press:  01 August 2009

JAVED YOUNAS
JAVED YOUNAS*
Affiliation:
Central Michigan University, Mount Pleasant, USA
*
*Email: youna1j@cmich.edu
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Abstract

This paper uses an augmented Feldstein–Horioka savings–investment methodology to examine the impact of institutional quality on the degree of capital mobility in developing countries. A high correlation between domestic investment and domestic savings can arise from the presence of institutional rigidities restricting the movement of capital across borders. We find that including different aspects of institutional quality raises the coefficient of the savings rate, implying lower capital mobility. However, the improvement in institutional quality that strengthens the legal system, reduces investment risks, and ensures democratic accountability, increases capital mobility in developing countries. Inclusion of foreign aid also has a positive impact on the coefficient of the savings rate.

Type
Research Article
Information
Journal of Institutional Economics , Volume 5 , Issue 2 , August 2009 , pp. 207 - 223
Copyright
Copyright © The JOIE Foundation 2009

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