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Description:
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The significant restructuring of international capital flows to developing
countries – in particular to Latin American countries – observed in the last quarter
century has generated significant research in the area to examine its potential impact on
development efforts . The resurgence of foreign direct investment (FDI ) and the
increasing significance of remittances , both as shares of gross domestic product (GDP ) ,
have made these types of capital flows the most analyzed .
Despite the large fraction of empirical studies that find a positive and significant
relationship between FDI and economic growth , an important fact that has been so far
overlooked in the literature is its impact on standards of living in host countries . This
dissertation first establishes the strong complementary connection between FDI and
economic growth in Latin America , measured by increases in GDP per capita growth
rates , to then examine additional channels through which it could affect the welfare of
the region . I first show that FDI has a positive effect on central government tax revenues ,
which is mainly channeled through its effect on taxes on goods and services . I then show
that FDI has a positive and significant effect on the employment rates in these host
countries , with female employment rate getting the largest impact – relative to males .
Remittances are another capital flow that plays a large and important role in
certain economies , exceeding 10 % of GDP in some countries . The impact of
remittances on the main macroeconomic measures of a small open economy is analyzed
in the last section using a stochastic limited participation model with cash in advance
constraints and costly adjustment of cash holdings . After verifying that the model responds adequately to standard shocks , a remittances shock is introduced to examine
the dynamic response of the representative economy . The results show that a positive
remittances shock forces the exchange rate to depreciate and lowers both output and
consumption in the period of the shock . The positive shock lowers utility during the
shock but raises it from the following period onwards , improving discounted utility after
10 years when remittances are 10 % of GDP and there are no adjustment costs . |