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Foreign Debt Flows and Domestic Credit: A Principal-Agent Approach


  • Esteban Gómez


  • Andrés Murcia Pabón


  • Nancy Zamudio Gómez



The relationship between capital flows and domestic credit emerges from different channels which are usually not directly identified. In this paper, a principal-agent approach is proposed in order to disentangle the channels through which shocks on capital debt flows can affect credit-related variables. The model predicts that a foreign credit crunch will affect aggregate credit and will reduce the proportion of firms with access to intermediated funds. A VEC model is estimated to empirically validate the predictions from the theoretical framework. In the short-run, a negative shock to foreign funds effectively reduces the proportion of firms with access to intermediated finance, whilst at the same time induces a substitution of funding by firms from foreign to local sources, thus effectively having a positive effect on domestic credit growth. Nonetheless, the estimated long-run relationship indicates that capital flows and credit are positively related. These results have important policy implications, related with the potential impact on credit (and access) generated by the use of certain macroprudential measures.

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  • Esteban Gómez & Andrés Murcia Pabón & Nancy Zamudio Gómez, "undated". "Foreign Debt Flows and Domestic Credit: A Principal-Agent Approach," Temas de Estabilidad Financiera 075, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:temest:075

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    Cited by:

    1. Diana Fernández Moreno & Dairo Estrada, "undated". "Colombian bank efficiency and the role of market structure," Temas de Estabilidad Financiera 076, Banco de la Republica de Colombia.

    More about this item


    Principal-Agent Model; Capital Flows; Credit; VEC Models. Classification JEL: D82; E51; C32;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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