Do capital flows change domestic credit allocation?

Anna Samarina*, Dirk Bezemer

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

13 Citations (Scopus)

Abstract

Since the 1990s, domestic bank credit has been reallocated away from lending to non-financial business and toward households. An expanding literature discusses negative effects on growth and stability of this change in credit allocation. We research its drivers. We hypothesize that if foreign capital flows into economies with few investment opportunities, it may substitute for domestic bank lending to non-financial business, so that bank balance sheets become more dominated by household lending. In GMM estimations on data for 36 economies over 1990-2011, we find evidence consistent with this mechanism. Foreign capital inflows into the non bank sector (but not into the bank sector) are associated with lower shares of business lending in domestic bank portfolios. The association is weaker in economies with more investment opportunities, whether proxied by investment shares, current account surpluses, or EMU membership. Our results highlight the importance of sectoral destination in determining the effects of capital flows. (C) 2015 Elsevier Ltd. All rights reserved.

Original languageEnglish
Pages (from-to)98-121
Number of pages24
JournalJournal of International Money and Finance
Volume62
DOIs
Publication statusPublished - Apr-2016

Keywords

  • Credit allocation
  • Capital inflows
  • Investment opportunities
  • GLOBAL FINANCIAL CRISIS
  • HOUSEHOLD DEBT
  • PANEL-DATA
  • GROWTH
  • MODELS

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