On the Growth Effect of Net Capital Inflows in Emerging Market Economies: A Panel Threshold Analysis

Abstract

This study examines the nonlinear growth effects of net capital inflows in a panel of 46 emerging market economies from 2002 to 2021 using dynamic panel threshold models. The findings reveal that FDI inflows impede economic growth under high-inflation regimes but enhance growth when financial development surpasses a critical threshold. Remittance inflows exert a negative effect on growth in the regime of high financial development, supporting the substitution reversal mechanism. Findings highlight the pivotal role of maintaining macroeconomic stability, deepening financial markets, and appropriately sequencing capital account liberalization to maximize the growth benefits of external finance in emerging market economies.