Towards Financial Stability: An Analysis of the Nexus between International Capital Flows, Financial System Stability, and the Effectiveness of Macroprudential Policy Interventions

The ever-changing economic conditions and assessment of the importance of capital flows on the financial system emphasize the necessity to address their implications for financial stability. With all the benefits associated with capital flows, such as technological transfer and industrial upgrade, capital flows influence an economy's economic conditions from various aspects, among many, financial stability. The study employs 2-step Arellano-Bond GMM estimation techniques to shed a light on the linkage between disaggregated gross capital flows and country-level financial stability over the 2000-2020 period for 115 emerging and advanced economies. The study finds an economically feasible and statistically significant relationship between capital flows and financial stability. The relationship is particularly clear in the post-crisis periods and for lending flows. Given the increased popularity of macroprudential policies as efficient tools to deter financial instability concerns, the study identifies the applicability and efficiency of these policies to mitigate the financial stability risks linked to gross capital flows. While macroprudential policy measures provide evidence of mitigating power throughout the thesis, the most of evidence derives from policy instruments targeting financial institutions. Alternative estimations and robustness checks performed to show the validity of the estimations.