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Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market

Author

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  • Tomas Williams

    (George Washington University)

Abstract

This paper uses a natural experiment to show that government access to foreign credit increases private access to credit. I identify a sudden, unanticipated, and ar- guably exogenous increase in capital inflows to the sovereign debt market in Colombia. This was due to J.P. Morgan’s inclusion of Colombian bonds into its emerging markets local currency government debt index, which led to an increase in the share of sovereign debt held by foreigners from 8.5 to 19 percent. This event had significant and hetero- geneous effects on Colombia’s commercial banks: banks that acted as market makers in the treasury market reduced their sovereign debt holdings by 7.8 percentage points of assets and increased their commercial credit availability by 4.2 percentage points of assets compared to the rest of the banks. The differential increase in credit was around 2 percent of GDP. Industry level evidence suggests that this had positive ef- fects on the real economy. A higher exposure to market makers led to a higher growth in employment, production, sales and GDP.

Suggested Citation

  • Tomas Williams, 2017. "Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market," Working Papers 2017-12, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2017-12
    as

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    File URL: http://www2.gwu.edu/~iiep/assets/docs/papers/2017WP/WilliamsIIEPWP2017-12.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lorenzo Pandolfi & Tomas Williams, 2017. "Capital Flows and Sovereign Debt Markets: Evidence from Index Rebalancings," CSEF Working Papers 487, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    bank lending; government debt; crowding out; international capital flows; foreign investors; market makers; benchmark indexes;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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