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The Effect of Episodes of Large Capital Inflows on Domestic Credit

  • Davide Furceri
  • Stéphanie Guichard
  • Elena Rusticelli

This paper analyses the effect of capital inflow shocks on the evolution of domestic credit. Using a panel of developed and emerging economies from 1970 to 2007, it is shown that in the two years following the beginning of a capital inflow shock the credit-to-GDP ratio increases by about 2 percentage points. The effect is reversed in the medium-term with the credit-to-GDP ratio decreased by almost 4 percentage points seven years after the initial shock. The paper also finds that the effect is different depending on the type of flows characterising the episode (debt vs. portfolio equity vs. FDI), with large capital inflows that are debt-driven having the largest effect. The results of the paper also suggest that the short-term effect of capital inflow shocks on domestic credit depends on countries’ macroeconomic policy stances. In particular, it is found that this effect is lower in countries with higher real exchange rate flexibility and fiscal policy counter-cyclicality. L'effet des épisodes d'entrées massives de capitaux sur le crédit intérieur Cette étude analyse l'effet des chocs d’entrées de capitaux sur l'évolution du crédit domestique. À l'aide d'un panel de pays développés et émergents de 1970 à 2007, il est montré que dans les deux années qui suivent le début d'un choc d’entrées de capitaux, le crédit rapporté au PIB augmente d'environ 2 points de pourcentage. L'effet est renversé à moyen terme, avec un rapport du crédit au PIB plus bas de près de 4 points de pourcentage, sept ans après le choc initial. Cette étude montre également que l'effet est différent selon le type de flux de capitaux qui caractérisent l'épisode (dette vs portefeuille en action vs IDE), avec un effet maximal pour les entrées dominées par la dette. Les résultats de l'étude suggèrent également que l'effet à court terme de chocs d'entrées de capitaux sur le crédit domestique dépend de l’orientation des politiques macroéconomiques des pays. En particulier, cet effet est plus faible dans les pays où la flexibilité du taux de change réel est plus élevée et la politique fiscale plus contracyclique.

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File URL: http://dx.doi.org/10.1787/5kgc9kpv8vg8-en
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Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 864.

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Date of creation: 17 May 2011
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Handle: RePEc:oec:ecoaaa:864-en
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  1. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2006. "Financial Globalization; A Reappraisal," IMF Working Papers 06/189, International Monetary Fund.
  2. Gian-Maria Milesi-Ferretti & Cedric Tille, 2011. "The Great Retrenchment: International Capital Flows During the Global Financial Crisis," Working Papers 382011, Hong Kong Institute for Monetary Research.
  3. Teulings, Coen N & Zubanov, Nick, 2010. "Is Economic Recovery a Myth? Robust Estimation of Impulse Responses," CEPR Discussion Papers 7800, C.E.P.R. Discussion Papers.
  4. Selim Elekdag & M. Ayhan Kose & Roberto Cardarelli, 2009. "Capital Inflows; Macroeconomic Implications and Policy Responses," IMF Working Papers 09/40, International Monetary Fund.
  5. Davide Furceri & Aleksandra Zdzienicka, 2010. "The Consequences of Banking Crises for Public Debt," OECD Economics Department Working Papers 801, OECD Publishing.
  6. Edwards, Sebastian, 2007. "Capital controls, capital flow contractions, and macroeconomic vulnerability," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 814-840, September.
  7. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2012. "Medium-Term Determinants Of International Investment Positions: The Role Of Structural Policies," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1250012-1-1.
  8. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
  9. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  10. Paul De Grauwe & Gunther Schnabl, 2008. "Exchange Rate Stability, Inflation, and Growth in (South) Eastern and Central Europe," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 530-549, 08.
  11. Reinhart, Carmen M. & Reinhart, Vincent, 2008. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," CEPR Discussion Papers 6996, C.E.P.R. Discussion Papers.
  12. Olga Arratibel & Davide Furceri & Reiner Martin & Aleksandra Zdzienicka, 2009. "The Effect of Nominal Exchange Rate Volatility on Real Macroeconomic Performance in the CEE Countries," Working Papers 0934, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  13. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "From Financial Crash to Debt Crisis," NBER Working Papers 15795, National Bureau of Economic Research, Inc.
  14. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  15. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2011. "Episodes of Large Capital Inflows and the Likelihood of Banking and Currency Crises and Sudden Stops," OECD Economics Department Working Papers 865, OECD Publishing.
  16. Atish R. Ghosh & Anne-Marie Gulde & Holger C. Wolf, 2003. "Exchange Rate Regimes: Choices and Consequences," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072408, June.
  17. International Monetary Fund, 2010. "The Credit Boom in the EU New Member States; Bad Luck or Bad Policies?," IMF Working Papers 10/130, International Monetary Fund.
  18. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  19. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
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