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Fundamentals, Financial Factors And The Dynamics Of Investment In Emerging Markets

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Executive Summary

The paper uses a Panel Vector Auto-Regression (PVAR) approach to analyze the short-run adjustment of private investment to shocks to fundamental and financial factors in emerging market economies. By relying on a panel of 31 emerging economies and quarterly frequency data for the period 1990:1-2008:3, the authors show that: investment sluggishly adjusts to its own shocks; GDP and equity price shocks have a positive and sizeable impact on investment; unexpected variation in the cost of capital and the lending rate has a negative (although economically small) effect on investment; and the response of investment to credit market developments seems to be driven by the demand side.

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