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dc.contributor.authorAkhtaruzzaman, Muhammad
dc.contributor.authorHajzler, Christopher
dc.contributor.authorOwen, P. Dorian
dc.identifier.citationAkhtaruzzaman, M., Hajzler, C., & Owen, P. D. (2016). Does institutional quality resolve the Lucas Paradox? (Economics Discussion Papers Series No. 1611). University of Otago. Retrieved from
dc.description.abstractThe Lucas Paradox observes that capital flows predominantly to relatively rich countries, contradicting the neoclassical prediction that it should flow to poorer capital-scarce countries. Alfaro, Kalemli-Ozcan, and Volosovych (2008) (AKV) argue that cross-country variation in institutional quality can fully explain the Paradox, contending that if institutional quality is included in regression models explaining international capital inflows, a country’s level of economic development is no longer statistically significant. We replicate AKV’s results using their cross-sectional IFS capital flow data. Motivated by the importance of conducting inference in statistically adequate models, we focus on misspecification testing of alternative functional forms of their empirical model of capital flows. We show that their resolution of the Paradox relies on inference in a misspecified model. In models that do not fail basic misspecification tests, even though institutional quality is a significant determinant of capital inflows, a country’s level of economic development also remains a significant predictor. The same conclusions are reached using an extended dataset covering more recent IFS international capital flow data, first-differenced capital stock data and additional controls.en_NZ
dc.publisherUniversity of Otagoen_NZ
dc.relation.ispartofseriesEconomics Discussion Papers Seriesen_NZ
dc.rightsAttribution-NonCommercial-ShareAlike 4.0 International*
dc.subjectLucas Paradoxen_NZ
dc.subjectcapital flowsen_NZ
dc.subjectforeign direct investmenten_NZ
dc.subjectmisspecification testingen_NZ
dc.titleDoes institutional quality resolve the Lucas Paradox?en_NZ
dc.typeDiscussion Paperen_NZ
otago.schoolOtago Business School / Department of Economicsen_NZ
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Attribution-NonCommercial-ShareAlike 4.0 International
Except where otherwise noted, this item's licence is described as Attribution-NonCommercial-ShareAlike 4.0 International