Determinants of Capital Inflows: Evidence from Sri Lanka

This paper investigates the causes of capital flows into Sri Lanka in the form of push and pull factors, using the Fully Modified Ordinary Least Square (FMOLS) approach and the Vector Error Correction Model (VECM) for the period from 2001Q1 to 2015Q2. The study consists of four specifications that employ total capital inflows as a dependent variable and disaggregate the total capital inflows to main three categories. Based on empirical estimates, this study observes that capital flows get attracted largely due to pull factors such as real GDP, interest rate and political stability. The study also establishes that the fundamental causes of capital flows in disaggregate levels differ. These results suggest that Sri Lanka needs to pay close attention to keep domestic macroeconomic variables in the right order in order to attract foreign capitals.