Capital Inflows, Exchange Rate Flexibility, and Credit Booms

By Nicolás E. Magud, Carmen M. Reinhart, Esteban Vesperoni. Social Science Research Network, 2011

166 citations recorded by the source corpus.

The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that bank credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks' incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/00eed34ce24bd3f75097b33b08e8fa2b487d2e98

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Citations in the corpus

Bank Asset Quality in Emerging Markets: Determinants and Spillovers (2012, background): “…data on 3824 manufacturing firms in 24 emerging countries, they find that a 9 Following is just a selection of papers on the topic; Dornbusch et al. (1995), Krugman (1999), Eichengreen and Hausman (2000), Calvo and Reinhart (2002) and Cespedes et al. (2004), Magud et al. (2011) and Kamil (2012).”
Financial Crises: Explanations, Types, and Implications (2013, unknown): “McKinnon and Pill (1996), Krugman (1998), and Corsetti, Pesenti, and Roubini (1998) suggest that over-borrowing by banks can arise due to government subsidies (to the extent that governments would bail out failing banks).”
The Impact of Geopolitical Risks on Financial Development: Evidence from Emerging Markets (2020, methodology): “The fixedeffects estimator is a standard method to analyze the determinants of domestic credits (Magud et al., 2014).”