In the world of free capital mobility, capital flows from low-return to high-return locations. In theory, capital inflows are transformed to physical capital and increase output in the recipient countries. In the empirical literature, the effects of capital inflows on economic growth have been extensively investigated using cross-country growth regressions. However, these studies have been silent about the scale of the benefits from capital inflows.
This study proposes a new methodology to quantify the benefits from capital inflows. We derive the estimation equation from a small open-economy growth model with an incomplete asset market. There are two goods: consumption good and investment good, which is produced from the consumption good. The model has two key features. First, the investment good is assumed to be nontraded and produced from output, which is homogeneous across countries. Second, the country-specific price of investment is driven by exogenous shocks on productivity of the investment good sector. These two assumptions are motivated by the following stylized facts.
The financial market has been dramatically changed in the last few months as the subprime mortgages meltdown in the USA dried up credit markets and funding liquidity (White 2008) and created a ripple effect in the global economy (Harmon 2008).
The impact of the global financial crisis, first felt in July 2007 when Bear Stearns, the fifth largest investment bank in the US , announced that two of its mortgage investment funds, worth about $US 1.5 billion, had literally no value left in them (Nason 2007). Then Lehman Brothers opted for the biggest bankruptcy in US history (The New Age, Dhaka, 8 December, 2008).
This study was funded by UNEP’s Sustainable Energy Finance Initiative (SEFI) and conducted by a consortium of consultants and advisors led by Marsh Ltd with the objective of providing an overview of the barriers and/or risks affecting investment in Renewable Energy (RE) projects, ‘financial risk management’ instruments currently supporting RE projects and those that could be developed to reduce uncertainty and facilitate more efficient and effective financing of such projects.
The study was undertaken under the premise that current approaches to financing renewable energy are inadequate to realize the potential of these technologies to meet expanding energy needs while helping to mitigate climate change and other adverse environmental impacts. Public interventions are therefore needed to help accelerate RE development, commercialization, and financing.
