An Empirical Study on the Impact of Deposit Insurance System on International Capital Inflows

Abstract

Abstract:

In the framework of a natural experiment, this paper establishes a panel model with difference-in-differences estimation and instrumental variable, taking financial data set of balance of payments from 1991 to 2016 in 31 emerging market countries. Then, from the perspective of capital profitability and capital security, it examines how the introduction of deposit insurance system affects international capital inflows. The results show that the introduction of deposit insurance system has a positive and statistically significant effect on international capital inflows in emerging market countries, and the positive role in the non-crisis period is more significant than that in the crisis period. The promotion degree of foreign direct investment inflow is significantly higher than that of portfolio investment inflow or other investment inflow. On the one hand, from the perspective of capital profitability, the introduction of deposit insurance system has a more positive and statistically significant effect on international capital inflows with the higher level of interest rate, and interest rate is the significant factor affecting the international capital inflows of emerging market countries under the condition of deposit insurance system. On the other hand, from the viewpoint of capital security, deposit insurance system has a positive and statistically significant effect on the international capital inflows in crisis years, which shows that deposit insurance system could increase the international capital inflows of emerging market countries by providing financial security during the crisis period. The results of this study have important policy implication for emerging market countries to establish a prudent management framework of international capital inflows under the condition of deposit insurance system.

Key words: deposit insurance system, international capital inflows, natural experiment, emerging market countries

Wang Xiaobo, Cai Zhiming, Xin Feifei. An Empirical Study on the Impact of Deposit Insurance System on International Capital Inflows[J]. , 2020, 32(2): 40-52.

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