Credit Growth, Current Account and Financial Depth

Credit Growth, Current Account and Financial Depth

Title:

Credit Growth, Current Account and Financial Depth

Number:

14/21

Author(s):

M. Fatih Ekinci, F. Pınar Erdem, Zübeyir Kılınç

Language:

English

Date:

June 2014

Abstract:

Exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles. Although the effects of structural variables are deeply analyzed, a lesser attention has been paid to the impact of financial variables. Drawing on standard empirical current account models and with a large sample of industrial and developing countries, we report a significant deterioration in the current account balance in case of an increase in the credit growth. Moreover, we find that this link is substantially stronger for the developing ones motivating a closer examination. Therefore, we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth. In other words, at the early stages of financial development, acceleration in the credit growth might cause a larger deterioration in the current account balance; thus, it might be suggested that monetary policy and macro-prudential measures aimed at preventing financial excess might be more effective to reduce the external imbalances at the early stages of financial deepening.

Keywords:

Credit Growth, Current Account Balance, Developing Countries, Financial Depth, Financial Excess, Global Imbalances, and Panel Data

JEL Codes:

F31; F32; F37; F41

Credit Growth, Current Account and Financial Depth
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