Financial Development and Extreme Capital Flows: Uncovering Resilience

This paper examines the impact of financial developments on extreme international capital inflow events by analyzing annual data for 29 economies from 2000 to 2020. By building on previous research, it reveals a subtle relationship: while financial development has greatly reduced the frequency of sudden stops in capital flows, it has simultaneously increased the likelihood that capital flows will surge. This paper uses the generalized method of Moments (GMM) model to investigate the dual role of financial development in managing extreme capital flow events. Specifically, it clarifies how financial developments can act as a "push and pull" against the potentially destabilizing effects of these events, thereby promoting a more sustainable path to economic growth and strengthening financial stability in the global economy. The study not only sheds light on the complex dynamics between financial development and capital flows, but also provides insights for formulating policies that can mitigate the adverse effects of financial development while maximizing its benefits..