The Dynamic Effects of Capital Inflows on Economic Growth of the Mediterranean Countries : Panel Cointegration Approach

This paper investigate the dynamic relationship between foreign capital inflows on economic growth of Mediterranean countries over the period 1980-2018 Foreign direct investment (FDI) and official development aid (ODA) were used as a main source of capital inflow in this study. A standard growth model are estimated using panel co-integration approach. In addition, both fixed-effects and random effects models were used to check for the significant of the parameters. Panel unit root are employed to check for the efficiency of the data. The long run relationship is estimated using fully modified OLS and: Panel Dynamic Least Squares (DOLS) methods. The empirical results reveal that there exist a long run co-integrating relationship between foreign aid, FDI and economic growth in Mediterranean countries. The results of FMLOS and DOLS show that FDI ODA variables are positive and have significant impact on the long run growth of the Mediterranean economy.. Further, fixed –effects method is selected as random effect model is rejected based on Hausman test result. The results of fixed effect show that FDI and Foreign aid variables ate positive and statistically significant. As a policy recommendation the study, suggest that proper absorptive capacity should be met in order to attract FDI and ODA such as sound macroeconomic policies, good institutions, deep financial institution, low inflation rate and supplementing public expenditures