Relationship Between Macroeconomic Stability and Private Investment Flows: Evidence from An Emerging Country (Peru, 1991-2022)
Year: 2025
Type: article
Abstract: This study investigates the relationship between macroeconomic stability and private investment flows in Peru between 1991 and 2022. The analysis addresses a key policy question for emerging economies: how fluctuations in growth, inflation, fiscal deficits, and exchange rates influence investor behavior and long-term capital formation. Using annual time-series data from the Central Reserve Bank of Peru, the study applies unit root tests, cointegration analysis, and error correction models (ECM) to examine both short-term adjustments and long-term equilibrium relationships. The methodological choice highlights the advantages of dynamic econometric techniques over correlational approaches used in prior studies. The findings indicate that GDP growth has a strong positive effect on private investment: a 4% rise in GDP is associated with a 6% increase in private investment. Exchange rate stability also matters, with private investment rising 0.57% for every 1% increase in the exchange rate. In contrast, inflation and large fiscal deficits exert a dampening effect on investment. These results align with Tobin’s Q theory of investment, neoclassical perspectives on capital accumulation, and Keynesian arguments about uncertainty. The results underscore those stable macroeconomic conditions, particularly fiscal discipline and controlled inflation, create a favorable climate for entrepreneurs, lenders, and foreign investors. Beyond economics, these findings have implications for accounting and financial reporting, as fiscal credibility and deficit management influence corporate disclosures, investor risk assessments, and capital allocation decisions. Peru’s experience demonstrates how macroeconomic stability fosters sustained private investment, with lessons applicable to other emerging economies in Latin America and beyond.
DOI: 10.14419/vky3p104
Language: English
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4415028594