EFFECT OF INWARD CAPITAL FLOWS ON FINANCIAL STABILITY IN NIGERIA

Capital outflows, if not properly managed, could result in instability of the financial system. This study, therefore, examines the effect of outward capital flows on financial stability in Nigeria, spanning over 2003:Q1 to 2019:Q4. The hypotheses were analysed using Error Correction Mechanism (ECM). The speed of adjustment to its long-run equilibrium was estimated at 10.2%. The findings showed that outward FD1 and other capital flows significantly affect financial stability in Nigeria. However, these effects are negative. In contrast, outward portfolio investment has a significant effect on financial stability in Nigeria. The analysis also showed that controlling for macroeconomic factors such as GDP and inflation rate does not significantly affect Nigeria's financial stability. Based on the findings, the study recommended that monetary authorities should adopt strict capital control measures to curb capital outflows such as outward FDI and other capital flows, which could distort the financial system and lead to instability.