Does institutional quality resolve the Lucas Paradox?

Akhtaruzzaman, Muhammad; Hajzler, Christopher; Owen, P. Dorian

doi:10.1080/00036846.2017.1321840

Cited by 8 publications

(6 citation statements)

References 65 publications

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“…Human capital and the degree of openness to foreign countries (development of foreign trade) were recognized as relevant for encouraging higher investment flows to the host state as well. Significantly, none of those factors fully resolved the paradox (Akhtaruzzaman et al, 2016).…”

Section: Literature Reviewmentioning

confidence: 94%

Empirical Verification of the Occurrence of Lucas Paradox in the Region of Central – Eastern Europe

Gorniak

2021

FiPF

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The purpose of this article is to study the occurrence of the Lucas paradox in the region of Central-Eastern Europe. According to the research conducted by Robert Lucas (1990), the direction of the international capital flows is different than the neoclassical theory suggests. The capital does not flow from the richer, high-income economies to the poorer, but rather stays in those with the higher capital resources or flows to the other ones with similar level of GDP. The paper verifies whether the paradox appears in the region, in the way that it examines the impact of the GDP on the FDI inflows. Additionally, the study implements few basic models with factors that may potentially resolve the puzzle of the capital flows. The study method is based on panel data estimations, initially using pooled OLS, and subsequently using fixed or random effects models as appropriate. The examined economies are the member states of the European Union, from the region of Central-Eastern Europe, and the examined years are 2000-2018. Based on the literature, and the widely emphasized need for differentiating between the types of international capital flows, the article focus is on the foreign direct investment only, as they constitute large part of the whole global capital flows. Results of the research confirm the presence of the paradox in the region in the examined period. Even though the estimation of the additional models helps to remove the effects of the paradox for the region, it does not fully explain under which circumstances the neoclassical theory would be applicable. None of the applied models reverses the sign of the GDP variable to negative, keeping it statistically significant at the same time.

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Section: Literature Reviewmentioning

confidence: 94%

Empirical Verification of the Occurrence of Lucas Paradox in the Region of Central – Eastern Europe

Gorniak

2021

FiPF

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“…logCapflows is the log of average capital flows per capita per year, measured as the sum of foreign direct investment and portfolio equity flowing into a country in a particular year. In particular, the natural logs are taken to suppress outliers and endogeneity [26,44,45]. logGDP represents real gross domestic product per capita in the base year (2002), which is fixed to capture the Lucas Paradox.…”

Section: Methodsmentioning

confidence: 99%

“…In terms of neoclassical economic theory, investments should occur in poorer economies if they are allowed to move freely, and this should continue to be true until investment returns are equalized in all countries [24][25][26]. However, Robert Lucas observed that evidence from reality stood contrary to what would be prescribed by neoclassical economic theory, wherein private capital did not actually flow into developing countries when comparing the state of capital inflows in the United States versus India.…”

Section: Implications Of the Lucas Paradox In Blended Financementioning

confidence: 99%

“…As expanding private capital flows is necessary to stimulate economic growth in developing countries, empirical studies have attempted to identify reasons why neoclassical theory diverges from economic reality. Prior studies have identified determinants such as capital market imperfections [27][28][29][30], information asymmetries [31,32], lack of financial development [33][34][35][36] and sovereign risk [37,38], with recent studies explaining the Lucas Paradox in light of institutional quality [26,[39][40][41][42]. Studies have then prescribed ways to expand private investment toward developing countries based on the results of applying this determinant to FDI and portfolio equity investment.…”

Section: Implications Of the Lucas Paradox In Blended Financementioning

confidence: 99%

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Can Blended Finance Be a Game Changer in Sustainable Development? An Empirical Investigation of the “Lucas Paradox”

Kim

Jun

2022

Sustainability

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In recent years, the global development community has been emphasizing blended finance approaches for economic development without taking into consideration practical implications of the Lucas Paradox, or the observation that capital does not flow from rich to poor countries. To prevent misuse of official development funds as catalysts for private flows, it is crucial to consider the direction of blended finance approaches in light of the Lucas Paradox. To fill this important gap in the literature, this paper investigates determinants of capital flows in recipient countries where a blended finance strategy is applied in light of the Lucas Paradox, with a focus on foreign direct investment and portfolio equity investment. For the analysis, this paper utilizes a cross-sectional sample of 157 countries between 2002 and 2018, including ODA recipients and OECD DAC members, by conducting a regression analysis based on the ordinary least squares (OLS). Our findings suggest that the Lucas Paradox strongly exists in all recipient countries that can utilize ODA as a catalyst, which is the core of the blended finance strategy. Institutional quality, human capital and asymmetric information improvement appear to mitigate the Lucas Paradox, although the paradox does not disappear entirely. In addition, total ODA, institutional and human capital appear to be determinants of the paradox in the multiple regression model.

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“…We focus on White's heteroscedasticity test since it is routinely used and reported in academic work on, for instance, agricultural economics (e.g., Bold et al, 2017), development economics (e.g., Hirvonen et al, 2017), innovation economics (e.g., Rojas et al, 2018;Stanko and Henard, 2017), …nancial economics (e.g., Bauer and Neuenkirch, 2017), …scal policy (e.g., Chen et al, 2017) or macro-economics (e.g., Atalla et al 2016;Montagnoli et al 2016). Over and above, in some cases, researchers start their empirical analysis by removing outliers and subsequently perform the White heteroscedasticity test -see, for instance, Akhtaruzzaman et al (2018), Ling and Wahab (2018), Carrera et al (2017) and Stanko and Henard (2017), amongst others. More generally, practitioners performing standard regression analysis are routinely confronted with the White test via built-in commands in statistical software packages such as Eviews, STATA or OxMetrics.…”

Section: Introductionmentioning

confidence: 99%

Heteroscedasticity testing after outlier removal

Berenguer-Rico

Wilms

2020

Econometric Reviews

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Given the e¤ect that outliers can have on regression and speci…cation testing, a vastly used robusti…cation strategy by practitioners consists in: (i) starting the empirical analysis with an outlier detection procedure to deselect atypical data values; then (ii) continuing the analysis with the selected non-outlying observations. The repercussions of such robustifying procedure on the asymptotic properties of subsequent inferential procedures are, however, underexplored. We study the e¤ects of such a strategy on testing for heteroscedasticity. Speci…cally, using weighted and marked empirical processes of residuals theory, we show that the White test implemented after the outlier detection and removal is asymptotically chi-square if the underlying errors are symmetric. In a simulation study, we show that -depending on the type of outliers -the standard White test can be either severely undersized or oversized, as well as have trivial power. The statistic applied after deselecting outliers has good …nite sample properties under symmetry but can su¤er from size distortions under asymmetric errors. Given these results, we devise an empirical modeling strategy to guide practitioners whose preferred approach is to remove outliers from the sample.

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Does institutional quality resolve the Lucas Paradox?

Cited by 8 publications

References 65 publications

Empirical Verification of the Occurrence of Lucas Paradox in the Region of Central – Eastern Europe

Empirical Verification of the Occurrence of Lucas Paradox in the Region of Central – Eastern Europe

Can Blended Finance Be a Game Changer in Sustainable Development? An Empirical Investigation of the “Lucas Paradox”

Heteroscedasticity testing after outlier removal

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