The Influence Of International Capital Flow On Financial Stability

Since the 1990 s,with the development of financial globalization and the continuous relaxation of financial regulation,the scale of international capital flows has shown a significant growth trend.The inflow of international capital flows provides sufficient funds for countries,especially developing countries,and leads the domestic trade structure and industrial structure to develop in a reasonable direction.Large-scale inflow of international capital into the host country,resulting in domestic asset prices bubble.When an external or internal shock occurs and the country's economy deteriorates,a massive withdrawal of cross-border capital can have a serious impact on the stability of the financial system and even trigger a financial crisis.There is a close relationship between cross-border capital flows and financial stability,the mechanism by which cross-border capital flows play a role in the stability of the financial,and how to take policy measures to reduce the impact of capital flows on financial stability,more and more attention from managers and scholars.This paper focuses on the mechanism of cross-border capital flows on financial stability and adopts the methods of theory and demonstration,part and whole analysis.A sample of 53 countries,including 27 developed and 26 developing countries,accounts for more than 70 per cent of the global economy.The research contents and conclusions are as follows:Chapter 1 Introduction.Including research background and research significance,research content,ideas and methods,innovation and deficiencies.Chapter 2 literature review.It includes four aspects: the impact of international capital flow on the financial stability of all countries,the impact of cross-border capital flow on price stability,the impact of cross-border capital flow on the stability of banking institutions,and the impact of cross-border capital flow on the stability of the stock market.Chapter 3 is the practical and theoretical basis of the impact of international capital flows on financial stability,including: the definition,types and characteristics of international capital flows in recent years;Theoretical model of cross-border capital flow and financial stability —— a monetary crisis model and a macroeconomic modelin an open economy.Chapter 4 studies the influence of international capital flow on the stability of price.This chapter from two angles to analyze,one is the capital inflow through the monetary expansion,resulting in rising inflation.The massive inflow of international capital,through the increase of foreign exchange reserves and foreign exchange income,and the increase of the base money supply,has led to the growth of the money supply and brought about inflationary pressure,raise the level of inflation.International capital inflow will make a country's investment level rise,and cause the corresponding price of supporting materials rise,thus inducing more domestic investment,and ultimately may cause the overall price level rise.This chapter uses panel data from 53 countries around the world to conduct an empirical analysis using the vector autoregression.Conclusion: International Capital Flow has a significant effect on the inflation level,and a country's aggregate demand is divided into five parts: household consumption,government consumption,investment,export and import,the inflow of international capital affects the total demand mainly through the three channels of consumption,investment and export,and then affects the price level.Chapter 5 the impact of international capital flows on the stability of banking institutions.This chapter studies the relationship between cross-border capital inflows and the stability of banking institutions by using the risk-taking level of banks as a measure of the stability of banking institutions.Through the literature research,we find that the mechanism of cross-border capital inflow to the bank's risk-taking level is affected by the bank's Heterogeneity.In this chapter,we use multi-threshold panel regression model to group the sample banks according to the compound heterogeneous threshold,the empirical results show that international capital inflow has a structural effect on the risk-taking of banks under the complex heterogeneity of bank size,profitability and capital ratio.The conclusions are as follows: for banks with high capital ratio,international capital inflow will increase their risk-taking level;for small banks with medium capital ratio,the effect of capital inflow on Bank risk-taking exists profitability threshold effect;For the banks with low capital ratio,the effect of international capital inflow on the risk-taking of banks has scalethreshold effect.Chapter 6 studies the impact of international capital flow on the stability of the stock market,using the linkage of major stock index returns as an index to measure the stability of the stock market.According to the literature research,international capital flow can significantly improve the linkage of stock market in the crisis period,which shows the risk contagion effect of international capital,including financial spillover and net contagion.First,a theoretical model is constructed to explore the impact of financial spillovers and net contagion on international portfolio investment during the period of financial crisis,using the two-step GMM method,this paper empirically tests whether the relative differences in economic development between the two countries will change the channel of international capital risk contagion.The conclusions of the study are as follows: If both countries are developed countries,international capital can have a direct impact on the linkage of stock market.The risk transmission channels of international capital include financial spillover and net contagion,and net contagion is more important than financial spillover,the level of bilateral financial development also plays a positive role;if at least one of them is a developing country,the direct impact of international capital on stock market linkage can be ignored,the risk transmission channel of international capital is only net transmission,and financial transmission does not play a role,the level of bilateral financial development has no effect,and the strengthening of bilateral trade links can enhance the linkage between the stock markets of the two countries regardless of their economic development.Chapter 7 examines the impact of the reversal of international capital flows on the financial stability of various countries from an overall perspective,including three parts: the first part is the construction of the Financial Stability Index using principal component analysis,the selected 19 basic indicators cover three dimensions:macro-level,micro-level and international economic environment level.The second part analyzes China's actual situation according to the financial stability index,and uses four indicators: The growth rate of fixed asset investment,the money supply,the inter-bank lending rate,and the ratio of deposits to broad money,then constrcut linear regression model to verify the rationality of Financial Stability Index.The third partexamines the factors that influence the reversal of international capital flows and,based on the Financial Stability Index,uses panel vector autoregression to empirically study the impact of capital flow reversals on financial stability.The results show that the macro-economic level,especially the ratio of private sector credit to GDP,has the greatest impact on China's financial stability,followed by the international economic environment,and the microeconomics level has the least impact on financial stability The factors affecting the reversal of international capital flows mainly include the scale of capital inflow,the level of financial deepening and the balance of government budget.The impact of various factors on the reversal of capital flows in developed and developing countries is different;the reversal of international capital flows has an indirect impact on financial stability mainly through the current account transmission channel,the transmission path of exchange rate fluctuation and asset price fluctuation is relatively weak.Chapter 8,based on the conclusion of the previous research,puts forward some policy recommendations on how to effectively manage cross-border capital flows to achieve the goal of financial stability.First,national regulatory authorities should attach great importance to the impact of international capital flows on financial stability and incorporate the structured management of cross-border capital flows into the framework of macroprudential regulation,secondly,the banking institutions of various countries should grasp the influence of international capital inflows on the risk-taking of banks in the course of their operations,to build a differentiated internal risk management system and adjust management strategies dynamically and appropriately to reduce the impact of international capital inflows.Finally,countries should speed up the establishment of capital account management mechanisms that match their own economic development,by adjusting the structure of domestic industrial development,establishing effective mechanisms to prevent market panic and government guarantee system,we can reduce the risk contagion of international capital market and realize the long-term and stable development of capital market.