Credit Growth, Current Account and Financial Depth

Mehmet Ekinci, Fatma Erdem and Zubeyir Kilinc (zubeyirkilinc@gmail.com)

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: Exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles. Although the effects of structural variables are deeply analyzed, a lesser attention has been paid to the impact of financial variables. Drawing on standard empirical current account models and with a large sample of industrial and developing countries, we report a significant deterioration in the current account balance in case of an increase in the credit growth. Moreover, we find that this link is substantially stronger for the developing ones motivating a closer examination. Therefore, we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth. In other words, at the early stages of financial development, acceleration in the credit growth might cause a larger deterioration in the current account balance; thus, it might be suggested that monetary policy and macro-prudential measures aimed at preventing financial excess might be more effective to reduce the external imbalances at the early stages of financial deepening.

Keywords: Credit Growth; Current Account Balance; Developing Countries; Financial Depth; Financial Excess; Global Imbalances; and Panel Data (search for similar items in EconPapers)
JEL-codes: F31 F32 F37 F41 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (2)

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Journal Article: Credit growth, current account and financial depth (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1421

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