External Debt Composition and Domestic Credit Cycles

53 Pages Posted: 19 Mar 2018

See all articles by Stefan Avdjiev

Stefan Avdjiev

Bank for International Settlements (BIS)

Stephan Binder

Independent

Ricardo Sousa

European Stability Mechanism

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Date Written: March 14, 2018

Abstract

We assess the role of external debt in shaping the dynamics of domestic credit cycles. Using quarterly data for 40 countries between 1980 and 2015, we examine four dimensions of external debt composition: instrument, sector, currency and maturity. We show that the first two dimensions provide valuable information about the likelihood of credit booms and busts. In particular, we find that a higher share of external bank lending in the form of bonds is associated with a greater likelihood of credit booms. Our results also reveal that credit busts tend to be associated with a lower share of interbank lending and a higher share of lending from banks to non-banks.

Keywords: credit cycles, external debt composition

JEL Classification: E10, E40, E50, E47

Suggested Citation

Avdjiev, Stefan and Binder, Stephan and Sousa, Ricardo, External Debt Composition and Domestic Credit Cycles (March 14, 2018). European Stability Mechanism Working Paper No. 28, ISBN: 978-92-95085-49-7. Available at SSRN: https://ssrn.com/abstract=3143191 or http://dx.doi.org/10.2139/ssrn.3143191

Stefan Avdjiev

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Stephan Binder

Independent

No Address Available

Ricardo Sousa (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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