Influence of capital flows on economic stability and development of small open economies


The article generalizes approaches to rationalize the role of international capital flows in the economic development and economic stability of small open economies during their transformation under the influence of contradictory globalization trends of liberalization and neo-protectionism in modern economic relations. It is determined that the movement of international capital flows has a limited impact on stimulating economic development, improving the structural and functional characteristics of the financial sector, and developing its institutions. At the same time inflows of volatile short-term capital largely form main factors of systemic risk of financial instability in small open economies. Based on the empirical data analysis, article determined factors of the international capital flows movement in small open economies. In particular, factors such as accelerated economic growth, appearance of high income instruments on financial, real estate, commodity markets, as well as relatively reliable debt instruments, determine the acceleration of capital inflows within the pro-cyclical component of its movement. On the other hand, there is a permanent outflow due to the underdevelopment of the institutional environment of transition economies, as well as negative expectations, which determine the parameters of outflow within the structural and pro-cyclical capital movements, provoking the realization of systemic risk of financial instability in small open economies. Due to obtained results, it is substantiated that the solution of the existing contradiction between the negative influence of the non-regulated capital flow on the financial stability of the small open economy and the objective necessity, according to the existing globalization of market relations, for small open economy move to financial openness, it requires forming special conditions for safe financial liberalization process defined by state economic development programs. In order to implement a safe and rational switch to financial openness, it is advisable to use a policy of international capital flow control and management, supporting it by measures of institutional development and, if necessary, by limitations on international capital flows.

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