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FINANCIAL RESTRAINTS AND PRIVATE INVESTMENT: EVIDENCE FROM A NONSTATIONARY PANEL

Authors

  • MAURO COSTANTINI,

    1. Costantini: Department of Economics and Finance, Brunel University, UK. Phone +44 0 1895 267958, Fax +44 0 1895 269 786, E-mail Mauro.Costantini@brunel.ac.uk
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  • PANICOS O. DEMETRIADES,

    1. Demetriades: Department of Economics, University of Leicester, Leicester LE1 7RH, UK. Phone +44 0 116 252 2835, Fax +44 0 116 252 2908, E-mail pd28@le.ac.uk
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  • GREGORY A. JAMES,

    1. James: School of Business and Economics, Loughborough University, UK. Phone +44 0 1509 222706, Fax +44 0 1509 223910, E-mail G.A.James@lboro.ac.uk
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  • KEVIN C. LEE

    1. Lee: School of Economics, University of Nottingham, UK. Phone +44 0 115 846 8368, Fax +44 0 115 951 4159, E-mail Kevin.Lee@nottingham.ac.uk
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    • We gratefully acknowledge financial support from the ESRC (award RES-156-25-0009 and PTA-026-27-1437). We would like to thank participants at the Royal Economic Society, Money, Macro and Finance Research Group, and Emerging Markets Group conferences for comments on earlier versions of this article. We would also like to thank workshop participants and discussants at the Cyprus University of Technology and at the ESRC-Garnet meeting at the University of Amsterdam. Special thanks to Badi Baltagi, Brian Burgoon, Wendy Carlin, Stijn Claessens, Stefano Fachin, Sourafel Girma, Luciano Gutierrez, Claudio Lupi, and Kate Phylaktis for many constructive suggestions. Comments from an anonymous referee substantially improved the article. The usual disclaimer applies.


Abstract

We employ recently developed panel data methods to estimate a model of private investment under financial restraints for 20 developing countries using annual data for 1972–2000. We show that the qualitative nature of the results varies depending on whether we take into account cross-country effects. When we allow for cross-sectional dependence, investment displays more sensitivity to world capital market conditions and exchange rate uncertainty. A perhaps even more surprising result is the finding that countries that managed to suppress domestic real interest rates without generating high inflation enjoyed higher levels of private investment than those that would have been obtained under liberalized conditions. (JEL O16, G18, G28)

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