Capital flows and credit booms in emerging market economies?
AbstractPrivate capital began flowing back to emerging market economies (EMEs) in 2002 and continued to mid-2006. In parallel, most of these countries also witnessed rapid growth in bank credit to the private sector (BCPS). This paper seeks to determine whether this strong credit expansion reflects financial deepening or excess liquidity. In the first case, this phenomenon forms part of an economic catch-up process. In the second, the main emphasis is on the potential weakness of domestic banking systems and increased macroeconomic vulnerabilities of the concerned countries. Capital inflows tend to exacerbate these risks, such that they often coincide with credit booms. Depending on the observation period and the sample of emerging countries, between 40% and 60% of credit booms took place at a time when capital inflows were high. However, the linkage between credit booms and banking and financial crises is weaker, insofar as only 6%-20% of credit booms lead to a crisis. To explore the role of capital inflows in the observed credit expansion in EMEs, this article presents an econometric analysis of a 27-country sample over the last four years. A two-stage approach is taken: first, countries that have experienced excessive growth in bank credit to the private sector are identifi ed; second, the causality relationship between capital inflows and bank credit in these countries is examined. The main findings suggest that of the 27 EMEs, which on the whole recorded strong capital inflows over the last four years, just nine experienced a credit boom. Moreover, there does not appear to be a clear-cut causality relationship between capital inflows and BCPS. It is therefore difficult to draw general conclusions as regards financial stability. In some countries, a combination of substantial capital infl ows and credit booms may generate risks of instability if the external financing causes profound macroeconomic and financial imbalances. In other countries, massive capital infl ows and rapid credit growth may be linked to a healthier process of financial deepening.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Banque de France in its journal Financial stability review.
Volume (Year): (2006)
Issue (Month): 9 (December)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Andreas Hoffmann, 2010.
"An Overinvestment Cycle In Central And Eastern Europe?,"
Wiley Blackwell, vol. 61(4), pages 711-734, November.
- Hoffmann, Andreas, 2009. "An Overinvestment Cycle in Central and Eastern Europe?," MPRA Paper 15668, University Library of Munich, Germany.
- Esteban Gómez & Sandra Rozo, 2008.
"Beyond Bubbles: The Role of Asset Prices in Early-Warning Indicators,"
ENSAYOS SOBRE POLÍTICA ECONÓMICA,
BANCO DE LA REPÚBLICA - ESPE.
- Esteban Gómez & Sandra Rozo, 2007. "Beyond Bubbles: The role of asset prices in early-warning indicators," BORRADORES DE ECONOMIA 004245, BANCO DE LA REPÚBLICA.
- Esteban Gómez & sandra Rozo, 2007. "Beyond Bubbles:The role of asset prices in early-warning indicators," BORRADORES DE ECONOMIA 004050, BANCO DE LA REPÚBLICA.
- Esteban Gómez & Sandra Rozo, . "Beyond Bubbles: The role of asset prices in early-warning indicators," Borradores de Economia 457, Banco de la Republica de Colombia.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Christine Petit-Djemad).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.