Capital Inflows, Exchange Rate Flexibility and Credit Booms

16 Pages Posted: 26 Jul 2014

See all articles by Nicolás E. Magud

Nicolás E. Magud

International Monetary Fund (IMF)

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Esteban Vesperoni

International Monetary Fund (IMF); University of Maryland, College Park

Multiple version iconThere are 3 versions of this paper

Date Written: August 2014

Abstract

Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, this paper analyzes the impact of exchange rate flexibility on credit markets during periods of large capital inflows. It is shown that bank credit is larger 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. The 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.

Suggested Citation

Magud, Nicolas E. and Reinhart, Carmen M. and Vesperoni, Esteban Rodrigo, Capital Inflows, Exchange Rate Flexibility and Credit Booms (August 2014). Review of Development Economics, Vol. 18, Issue 3, pp. 415-430, 2014. Available at SSRN: https://ssrn.com/abstract=2472247 or http://dx.doi.org/10.1111/rode.12093

Nicolas E. Magud (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Esteban Rodrigo Vesperoni

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

University of Maryland, College Park ( email )

College Park, MD 20742
United States

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