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Taming the "Capital Flows-Credit Nexus": A Sectoral Approach

Author

Listed:
  • Daniel Carvalho

    (Banco de Portugal)

  • Etienne Lepers

    (Organisation for Economic Co-operation and Development)

  • Rogelio Jr Mercado

    (Asian Development Bank)

Abstract

An important channel through which capital flows may lead to financial vulnerabilities is by fuelling domestic credit booms, the so-called "capital flows-credit growth nexus". This paper makes two important contributions to the study of this nexus (i) it adopts a sectoral approach to the relationship between cross-border capital flows and domestic credit growth and (ii) it studies how di erent macroprudential and financial policies affect that relationship. Using novel datasets on both sectoral flows and policy measures for 36 emerging economies for the 2000-2018 period, the results not only underscore the importance of a granular sectoral approach to identify the full range of connections between capital flows and credit growth, but also regarding the appropriate policy response. While, in general, macroprudential policies and foreign currency-based measures are more suited to mitigate the impact of banking sector flows, capital controls may be e ective in the presence of non-financial corporates (NFC) and other financial corporates flows. Breaking by borrowing sectors, within macroprudential measures, lending standards and measures targeted at household credit weaken the impact of inflows on household credit and measures aimed at household credit actually strengthen the relationship between NFC flows and NFC credit suggesting a potential shift in composition.

Suggested Citation

  • Daniel Carvalho & Etienne Lepers & Rogelio Jr Mercado, 2021. "Taming the "Capital Flows-Credit Nexus": A Sectoral Approach," Trinity Economics Papers tep0921, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:tep0921
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    Keywords

    capital flows; domestic credit; sectors;
    All these keywords.

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

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