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Domestic credit cycles ad extreme capital flow episodes

Author

Listed:
  • David de Villiers

    (University of Cape Town)

  • Hylton Hollander

  • Dawie van Lill

Abstract

Extreme international capital movements can distort domestic credit boom and bust cycles. Empirical evidence remains unclear about the effectiveness of macroprudential policy and capital controls in maintaining financial stability during these episodes. We construct a panel dataset for 32 countries from 1986Q1 to 2020Q3 and use a probit model to study the role of international capital mobility in shaping the dynamics of domestic credit cycles. A probit model is particularly suited for handling binary outcomes (boom or not boom). Our findings indicate that the credit cycle varies across advanced and emerging market economies. Additionally, heterogeneous capital flow episodes have asymmetric effects on credit booms and busts. We further show that capital controls are more effective in regulating inflows and reducing the likelihood of credit busts, while macroprudential policies are more effective at reducing the probability of credit booms.

Suggested Citation

  • David de Villiers & Hylton Hollander & Dawie van Lill, 2025. "Domestic credit cycles ad extreme capital flow episodes," ERSA Working Paper Series 57, Economic Research Southern Africa.
  • Handle: RePEc:rza:ersawp:57
    as

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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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