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Taming the “Capital Flows-Credit Nexus”: A Sectoral Approach

Author

Listed:
  • Daniel Carvalho

    (Banco de Portugal)

  • Etienne Lepers

    (OECD)

  • Rogelio Mercado

    (The SEACEN Centre)

Abstract

Capital inflows may lead to financial vulnerabilities by fuelling domestic credit booms, the so-called “capital flows-credit growth nexus”, which is of particular importance for emerging market economies. This paper makes two important innovations in understanding this nexus: 1) it adopts a sectoral approach; and 2) it assesses the effectiveness of different financial policies (macroprudential and capital controls) in taming the nexus. Using novel datasets on sectoral capital flows and policies, the results show that some measures can mitigate domestic credit growth, not only directly, but also indirectly, through the reduction of the sensitivity of credit to capital inflows. Furthermore, the results underscore the importance of a granular sectoral approach in identifying the full range of connections between capital flows and credit growth, as well as the appropriate policy response. The findings offer support on the use of a broad policy toolkit in taming the capital inflows and credit growth nexus.

Suggested Citation

  • Daniel Carvalho & Etienne Lepers & Rogelio Mercado, 2025. "Taming the “Capital Flows-Credit Nexus”: A Sectoral Approach," Open Economies Review, Springer, vol. 36(2), pages 373-429, April.
    • Handle: RePEc:kap:openec:v:36:y:2025:i:2:d:10.1007_s11079-024-09762-9
    DOI: 10.1007/s11079-024-09762-9
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    More about this item

    Keywords

    Capital flows; Domestic credit; Sectors; Capital controls; Macroprudential measures;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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