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

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.

Citation

Ebire, K., Ullah, S., Adeleye, B.N. and Shah, M.I. (2021), "Effect of capital flows on financial stability in middle-income countries", Journal of Financial Regulation and Compliance, Vol. 29 No. 5, pp. 491-513. https://doi.org/10.1108/JFRC-08-2020-0081