Paper Title
EMERGING MARKET ECONOMIES ON EFFECTS OF CAPITAL FLOW LIBERALIZATION FROM RECENT EXPERIENCESAbstract
Capital flows to emerging market economies (EMEs) have been characterized by high volatility. In recent years although gross as well as net capital flows to the EMEs have increased, they could not be absorbed domestically. Overall, savings have migrated from emerging markets to developed economies, casting doubt on the commonly held belief that capital flows to emerging markets always benefit from the expansion of their resources, which in turn leads to higher levels of investment there. EMEs\' growth potential could be harmed by complete financial liberalization, which could lead to unwelcome volatility. Financial inclusion and stock market development have also seen a positive shock, which we believe is linked to wider cross-border capital flows. We investigate, in particular, whether banking regulation reduces the negative effects on economic growth of capital flow volatility. By reducing the negative impact of erratic capital flows, we have found that banking supervision enhances economic growth across countries and over four decades. The conclusions are valid for both aggregate capital flows and their numerous components, as well as for net and gross counterparts, and they are also valid for various regulatory policy indicators. It turns out that bank regulatory policies aimed at maintaining financial stability are also advantageous for long-term economic growth.
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