Domestic credit cycles ad extreme capital flow episodes

David de Villiers (), Hylton Hollander () and Dawie van Lill ()

ERSA Working Paper Series, 2025

Abstract: Extreme international capital movements can distort domestic credit boom and bust cycles. Empirical evidence remains unclear about the effectiveness of macroprudential policy and capital controls in maintaining financial stability during these episodes. We construct a panel dataset for 32 countries from 1986Q1 to 2020Q3 and use a probit model to study the role of international capital mobility in shaping the dynamics of domestic credit cycles. A probit model is particularly suited for handling binary outcomes (boom or not boom). Our findings indicate that the credit cycle varies across advanced and emerging market economies. Additionally, heterogeneous capital flow episodes have asymmetric effects on credit booms and busts. We further show that capital controls are more effective in regulating inflows and reducing the likelihood of credit busts, while macroprudential policies are more effective at reducing the probability of credit booms.

Keywords: credit cycle; extreme capital flows; capital controls; Macroprudential Policy (search for similar items in EconPapers)
Date: 2025
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