Asymmetric Effects of Credit Growth on the Current Account Balance: Panel Data Evidence

Expanding current account balancesCurrent account balance (both surpluses and deficits) prior to the global economic crisis dominated academic and policy debates over the past decade. Understanding the role of credit growthCredit growth on the current account balanceCurrent account balance has become a priority particularly with the rebalancing experience in the post-crisis period. In this study, we adopt a comprehensive framework by constructing an empirical model that accommodates asymmetric adjustments of current account balanceCurrent account balance to the changes in the total and household credit growthCredit growth. We consider the asymmetric effects in two dimensions. When we discriminate between credit expansion and contraction episodes, our results show that credit growth has a stronger negative impact on the current account balanceCurrent account balance during credit expansion periods. Furthermore, negative effects of total and household credit growthCredit growth on the current account balanceCurrent account balance are more pronounced during current account deficit episodes.