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Openness and financial stability

Listed author(s):
  • Christopher Baum
  • Madhavi Pundit
  • Arief Ramayandi

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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Paper provided by EcoMod in its series EcoMod2015 with number 8652.

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Date of creation: 01 Jul 2015
Handle: RePEc:ekd:008007:8652
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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  2. Julián A. Caballero, 2016. "Do Surges in International Capital Inflows Influence the Likelihood of Banking Crises?," Economic Journal, Royal Economic Society, vol. 126(591), pages 281-316, 03.
  3. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2013. "Gross capital flows: Dynamics and crises," Journal of Monetary Economics, Elsevier, vol. 60(1), pages 113-133.
  4. Giannetti, Mariassunta, 2007. "Financial liberalization and banking crises: The role of capital inflows and lack of transparency," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 32-63, January.
  5. Daniel, Betty C. & Jones, John Bailey, 2007. "Financial liberalization and banking crises in emerging economies," Journal of International Economics, Elsevier, vol. 72(1), pages 202-221, May.
  6. Graciela L. Kaminsky, 2005. "International Capital Flows, Financial Stability and Growth," Working Papers 10, United Nations, Department of Economics and Social Affairs.
  7. Graciela Laura Kaminsky & Sergio L. Schmukler, 2008. "Short-Run Pain, Long-Run Gain: Financial Liberalization and Stock Market Cycles," Review of Finance, European Finance Association, vol. 12(2), pages 253-292.
  8. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  9. Korkut Erturk, 2005. "Economic Volatility and Capital Account Liberalization in Emerging Countries," International Review of Applied Economics, Taylor & Francis Journals, vol. 19(4), pages 399-417.
  10. Bordo, Michael D. & Meissner, Christopher M. & Stuckler, David, 2010. "Foreign currency debt, financial crises and economic growth: A long-run view," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 642-665, June.
  11. Scott W Hegerty, 2011. "Do international capital flows smooth or transmit macroeconomic volatility? Time-series evidence from emerging markets," Economics Bulletin, AccessEcon, vol. 31(2), pages 1659-1672.
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