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Financial globalization or great financial expansion? The impact of capital flows on credit and banking crises

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  • Jon Frost
  • Ruben van Tilburg

Abstract

This paper empirically examines the impact of capital flows on credit growth, credit excesses and banking crises using quarterly panel data from 43 advanced (AEs) and emerging market economies (EMEs). Regressions show that gross capital inflows precede credit growth and credit excesses. Both gross inflows and high private domestic credit precede banking crises. Formalized hypotheses allow us to study whether domestic or international drivers more frequently precede banking crises, and thus to evaluate "financial globalization" and the "great financial expansion" as explanations for country vulnerability to banking crises. Our evidence provides support for both narratives as drivers of country vulnerability; financial globalization seems to matter particularly for EMEs. We also provide some ground for caution on the effectiveness of capital controls and the desirability of very high levels of private credit to GDP.

Suggested Citation

  • Jon Frost & Ruben van Tilburg, 2014. "Financial globalization or great financial expansion? The impact of capital flows on credit and banking crises," DNB Working Papers 441, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:441
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    References listed on IDEAS

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    Cited by:

    1. Janko Cizel & Jon Frost & Aerdt Houben & Peter Wierts, 2019. "Effective Macroprudential Policy: Cross‐Sector Substitution from Price and Quantity Measures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1209-1235, August.
    2. Araujo, Juliana D. & David, Antonio C. & van Hombeeck, Carlos & Papageorgiou, Chris, 2017. "Joining the club? Procyclicality of private capital inflows in lower income developing economies," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 157-182.

    More about this item

    Keywords

    Gross capital flows; credit bubbles; financial globalization; banking crises;

    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
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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