The Cyclicality of Official Bilateral Lending: Which Cycle do Flows Follow?

Abstract

Using a large panel of official bilateral loan data for 111 borrowing countries and 78 lending countries between 1980 and 2020, the paper shows that international government borrowing from bilateral sources is a-cyclical with respect to the business cycle of the borrower but procyclical with respect to the cycle of the lending country. This holds in the case of lenders from advanced economies and lenders from China, currently the largest supplier of official bilateral loans to the average developing country. We find this form of procyclicality mostly in the case of middle-income recipient countries and in most regions of the world. We also find that bilateral loans follow economic links captured through bilateral trade, and political ties measured as the closeness of votes in the United Nations. The results are consistent across a battery of robustness tests.

Keywords: Bilateral debt, cyclicality, capital flows, international government debt

JEL Classification: E60, F32, F34