International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth

International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth

Title:

International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth

Number:

14/18

Author(s):

Yavuz Arslan, Temel Taşkın

Language:

English

Date:

May 2014

Abstract:

The extent of interaction between international capital flows and macro-financial stability is an important and unsettled topic of debate. We contribute to this discussion by providing empirical evidence on the relationship between capital flows and domestic credit growth using a large cross-country panel dataset which includes both developed and developing economies. In the benchmark regression, we use a fixed effect model, and find a statistically significant and positive co-movement between the two variables, which is consistent with common wisdom and recent theory a la Bruno and Shin (2014). This empirical regularity is more pronounced in upper-middle income countries in comparison with the lower-middle and high income countries. The main results are robust to other econometric specifications and a variety of alternative measures for credit growth and capital flows.

Keywords:

Cross-border capital flows, Domestic credit growth, Macro-financial stability, Cross-country evidence

JEL Codes:

E51; F32; G15

International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth
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