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The Effect of Episodes of Large Capital Inflows on Domestic Credit

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Listed:
  • Davide Furceri

    (OECD)

  • Stéphanie Guichard

    (OECD)

  • Elena Rusticelli

    (OECD)

Abstract

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.

Suggested Citation

  • Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2011. "The Effect of Episodes of Large Capital Inflows on Domestic Credit," OECD Economics Department Working Papers 864, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:864-en
    DOI: 10.1787/5kgc9kpv8vg8-en
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    More about this item

    Keywords

    capital inflows; credit booms; crédit intérieur; domestic credit; entrées de capitaux; flambée du crédit;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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