Theory on capital account liberalization (CAL) posits that opening up capital accounts should result in inflows of capital to developing countries. Empirical evidence of this for Sub-Saharan Africa (SSA) remains wanting. This study was, therefore, aimed at examining the effects of CAL on capital inflows to SSA. We employ both Fixed Effects and System-GMM estimators for a panel of SSA 13 countries from 1996 to 2013. We also employ sample splitting and threshold effects methodology to examine possible asymmetries in capital flows to SSA. From our study, we find that capital account liberalization promotes capital flows to SSA. We also find evidence of the existence of threshold effects of financial sector development and institutional quality. That is, higher levels of intuitional quality and financial sector development are deemed beneficial to maximize benefits from CAL.
Capital Account Liberalization and Capital Flows to Sub-Saharan Africa: A Panel Threshold Approach
Working paper 802