Capital inflows and credit growth: where do we stand?

Based on a sample of 31 advanced and emerging market economies, this Rue de la Banque shows that capital inflows tend to have a procyclical effect on domestic credit to the private sector. The lower the gross domestic product (GDP) per capita of a recipient country, the stronger the response of domestic credit to cross-border inflows. This may explain why these economies tend to restrain capital movements. Furthermore, credit is more sensitive to capital inflows in countries where exchange rate regimes are less flexible. Lastly, after a few months, procyclicality is stronger in economies where there is a large presence of foreign banks, and where outstanding cross-border bank claims on the country are high relative to domestic financial markets.