IDEAS home Printed from https://ideas.repec.org/p/bdr/temest/075.html
   My bibliography  Save this paper

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

Author

Listed:
  • Esteban Gómez
  • Andrés Murcia Pabón
  • Nancy Zamudio Gómez

Abstract

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.

Suggested Citation

  • Esteban Gómez & Andrés Murcia Pabón & Nancy Zamudio Gómez, 2013. "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
    DOI: 10.32468/tef.75
    as

    Download full text from publisher

    File URL: https://doi.org/10.32468/tef.75
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. José Eduardo Gómez-González & Luisa Silva & Sergio Restrepo & Mauricio Salazar, 2012. "Flujos de capital y fragilidad financiera en Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 30(69), pages 68-109, December.
    2. Renu Kohli, 2004. "Capital Flows and Domestic Financial Sector in India," International Finance 0405012, University Library of Munich, Germany.
    3. Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77-122.
    4. Philip R. Lane & Peter McQuade, 2014. "Domestic Credit Growth and International Capital Flows," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 218-252, January.
    5. Leonardo Villar Gómez & David Salamanca Rojas & Andrés Murcia Pabón, 2005. "Crédito, Represión Financiera y Flujos de Capitales en Colombia: 1974-2003," BORRADORES DE ECONOMIA 002236, BANCO DE LA REPÚBLICA.
    6. Aizenman, Joshua & Jinjarak, Yothin, 2009. "Current account patterns and national real estate markets," Journal of Urban Economics, Elsevier, vol. 66(2), pages 75-89, September.
    7. Tang, Hong Peng & Habibullah, Muzafar Shah & Puah, Chin-Hong, 2007. "Stock market and economic growth in selected Asian countries," MPRA Paper 37649, University Library of Munich, Germany.
    8. Bengoa, Marta & Sanchez-Robles, Blanca, 2003. "Foreign direct investment, economic freedom and growth: new evidence from Latin America," European Journal of Political Economy, Elsevier, vol. 19(3), pages 529-545, September.
    9. Concha, Alvaro & Galindo, Arturo José & Vasquez, Diego, 2011. "An assessment of another decade of capital controls in Colombia: 1998–2008," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 319-338.
    10. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    11. Choong, Chee-Keong & Baharumshah, Ahmad Zubaidi & Yusop, Zulkornain & Habibullah, Muzafar Shah, 2010. "Private capital flows, stock market and economic growth in developed and developing countries: A comparative analysis," Japan and the World Economy, Elsevier, vol. 22(2), pages 107-117, March.
    12. Leonardo Villar Gómez & David M. Salamanca Rojas, 2005. "Un modelo teórico sobre crédito, represión financiera y flujos de capital," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 23(48), pages 184-233, Junio.
    13. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    14. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    15. Kosuke Aoki & Gianluca Benigno & Nobuhiro Kiyotaki, 2009. "Capital Flows and Asset Prices," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 175-216, National Bureau of Economic Research, Inc.
    16. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
    17. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    18. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
    19. Chung‐Hua Shen & Chien‐Chiang Lee & Chi‐Chuan Lee, 2010. "What Makes International Capital Flows Promote Economic Growth? An International Cross‐Country Analysis," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(5), pages 515-546, November.
    20. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Diana Fernández Moreno & Dairo Estrada, 2013. "Colombian bank efficiency and the role of market structure," Temas de Estabilidad Financiera 076, Banco de la Republica de Colombia.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Juan Carlos Cuestas & Karsten Staehr, 2014. "The great (De)leveraging in the GIIPS countries. Domestic credit and net foreign liabilities 1998–2013," Bank of Estonia Working Papers wp2014-4, Bank of Estonia, revised 10 Oct 2014.
    2. Demirgüç-Kunt, Asli & Horváth, Bálint L. & Huizinga, Harry, 2017. "How does long-term finance affect economic volatility?," Journal of Financial Stability, Elsevier, vol. 33(C), pages 41-59.
    3. Eduardo Olaberría, 2014. "Capital Inflows and Booms in Asset Prices: Evidence from a Panel of Countries," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 8, pages 255-290, Central Bank of Chile.
    4. Beck, Thorsten & Lundberg, Mattias & Majnoni, Giovanni, 2006. "Financial intermediary development and growth volatility: Do intermediaries dampen or magnify shocks?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1146-1167, November.
    5. Olivier Blanchard, 2000. "What Do We Know about Macroeconomics that Fisher and Wicksell Did Not?," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1375-1409.
    6. Xu, T.T., 2012. "The role of credit in international business cycles," Cambridge Working Papers in Economics 1202, Faculty of Economics, University of Cambridge.
    7. Rodolfo Cermeño & María Roa García & Claudio González-Vega, 2012. "Financial Development and Volatility of Growth: Time Series Evidence for Mexico and USA," DEGIT Conference Papers c017_035, DEGIT, Dynamics, Economic Growth, and International Trade.
    8. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, vol. 64(2), pages 247-275, December.
    9. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    10. Nicoletta Batini & Mr. Giovanni Melina & Stefania Villa, 2016. "Fiscal Buffers, Private Debt, and Stagnation: The Good, the Bad and the Ugly," IMF Working Papers 2016/104, International Monetary Fund.
    11. Gabriel Jiménez & Steven Ongena & José-Luis Peydró & Jesús Saurina, 2017. "Do demand or supply factors drive bank credit,in good and crisis times?," Economics Working Papers 1567, Department of Economics and Business, Universitat Pompeu Fabra.
    12. Anundsen, André K. & Jansen, Eilev S., 2013. "Self-reinforcing effects between housing prices and credit," Journal of Housing Economics, Elsevier, vol. 22(3), pages 192-212.
    13. Paul Castillo & Cesar Carrera & Marco Ortiz & Hugo Vega, 2014. "Spillovers, capital ows and prudential regulation in small open economies," BIS Working Papers 459, Bank for International Settlements.
    14. Christian Bustamante, 2011. "Política monetaria contracíclica y encaje bancario," Borradores de Economia 646, Banco de la Republica de Colombia.
    15. Acharya, Viral V. & Imbierowicz, Björn & Steffen, Sascha & Teichmann, Daniel, 2020. "Does the lack of financial stability impair the transmission of monetary policy?," Journal of Financial Economics, Elsevier, vol. 138(2), pages 342-365.
    16. Radde, Sören, 2015. "Flight to liquidity and the Great Recession," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 192-207.
    17. Bougheas, Spiros & Mizen, Paul & Yalcin, Cihan, 2006. "Access to external finance: Theory and evidence on the impact of monetary policy and firm-specific characteristics," Journal of Banking & Finance, Elsevier, vol. 30(1), pages 199-227, January.
    18. Alejandro Jara & Eduardo Olaberría, 2013. "Are all Capital Inflows Associated with Booms in House Prices? An Empirical Evaluation," Working Papers Central Bank of Chile 696, Central Bank of Chile.
    19. Chen, Nan-Kuang, 2001. "Bank net worth, asset prices and economic activity," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 415-436, October.
    20. Hendrik Hakenes & Iftekhar Hasan & PhilIP Molyneux & Ru Xie, 2015. "Small Banks and Local Economic Development," Review of Finance, European Finance Association, vol. 19(2), pages 653-683.

    More about this item

    Keywords

    Principal-Agent Model; Capital Flows; Credit; VEC Models.;
    All these keywords.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdr:temest:075. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/brcgvco.html .

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Clorith Angélica Bahos-Olivera (email available below). General contact details of provider: https://edirc.repec.org/data/brcgvco.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.