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The Great Leveraging in the GIIPS Countries: Domestic Credit and Net Foreign Liabilities

Author

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  • Juan Carlos Cuestas

    (Department of Economics, University of Sheffield)

  • Karsten Staehr

    (Tallinn University of Technology, Estonia)

Abstract

This paper analyses the relationship between domestic credit and foreign capital flows in the GIIPS countries during the Great Moderation before the global financial crisis. Cointegration analyses on the pre-crisis sample reveal that domestic credit and net foreign liabilities are cointegrated for Greece, Italy, Portugal and Spain, but not for Ireland. For the first four countries the long-run coefficient is in all cases around one, suggesting a close relationship between domestic leveraging and foreign capital inflows. Estimation of VECMs shows that the adjustment to deviations from the long-run relationship takes place through changes in domestic credit for Greece and Italy, while the adjustment is bidirectional for Spain and possibly also Portugal. These results suggest that “push” factors related to foreign capital inflows were important in the pre-crisis leveraging. The deleveraging after the crisis was largely unrelated to developments in foreign capital flows.

Suggested Citation

  • Juan Carlos Cuestas & Karsten Staehr, 2015. "The Great Leveraging in the GIIPS Countries: Domestic Credit and Net Foreign Liabilities," Working Papers 2015012, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2015012
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    File URL: http://www.sheffield.ac.uk/economics/research/serps/articles/2015_012
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    1. Unger, Robert, 2017. "Asymmetric credit growth and current account imbalances in the euro area," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 435-451.

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    More about this item

    Keywords

    leveraging; capital flows; financial crisis; cointegration;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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