Openness and financial stability
This paper investigates the relationship between a country's financial openness and its domestic financial stability. We evaluate the relationship between gross capital flows and various measures of financial stability for 16 emerging and newly industrialized economies by considering not only the levels of gross capital flows, but also their volatilities, as the latter may have particular relevance for stability of the financial sector.For each measure of financial stability, we employ systems of seemingly unrelated regression (SUR) estimators to allow for complete flexibility of the estimated relationships while allowing for cross-equation restrictions to be tested and, if warranted, imposed on the equation system. The findings suggest that there are significant effects of gross capital flows' levels and volatilities on both the level and volatility of the financial stability proxies after controlling for a number of macroeconomic factors, with a clear impact of the gross capital flows' volatility on the level of financial stability.
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