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Effect of capital flows on financial stability in middle-income countries

Author

Listed:
  • Kolawole Ebire
  • Saif Ullah
  • Bosede Ngozi Adeleye
  • Muhammad Ibrahim Shah

Abstract

Purpose - This study aims to examine the effect of various forms of capital flows on financial stability in middle-income countries from 2010 to 2017 using the World Bank economy classifications of 121 economies. Design/methodology/approach - Panel spatial correlation consistent approach was used in this study. Findings - The findings provide convincing evidence that in middle-income countries, capital flows are positive and significant predictors of financial stability and that financial systems in advanced economies are more stable than those of emerging and developing countries. However, outward foreign direct investments are shown to have the largest potential for ensuring financial stability. Originality/value - Globalization has fostered financial integration of nations, which is manifested in capital flows from lower-income countries to middle-income and upper-income countries and vice versa. These flows can lead to financial instability if not properly controlled. The authors show how the various forms of capital flows affect the financial stability in middle-income countries.

Suggested Citation

  • Kolawole Ebire & Saif Ullah & Bosede Ngozi Adeleye & Muhammad Ibrahim Shah, 2021. "Effect of capital flows on financial stability in middle-income countries," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 29(5), pages 491-513, August.
    • Handle: RePEc:eme:jfrcpp:jfrc-08-2020-0081
    DOI: 10.1108/JFRC-08-2020-0081
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    More about this item

    Keywords

    Capital flows; Financial stability; Foreign direct investment; Middle-income countries; E58; F20; F30; G01;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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