Foreign Debt Flows and the Credit Market: A Principal Agent Approach

Esteban Gómez (), Andrés Murcia and Nancy Zamudio

Revista ESPE - Ensayos Sobre Política Económica, 2014, vol. 32, issue 73, No 11976, 87-103

Abstract: As has been documented in different studies, there is a close relationship between capital flows and domestic credit. This relationship emerges from different channels, which are usually not directly identified. In this paper, a principal-agent approach is proposed in order to disentangle the distinct channels through which shocks on capital debt flows can affect credit-related variables. The model predicts that a foreign credit crunch will not only adversely affect aggregate credit, but will reduce the proportion of firms with access to intermediated funds. Using a comprehensive micro data set for the period comprised between 1999Q1-2012Q1 on foreign debt flows and the relevant credit-related variables, a VEC model is estimated to empirically validate the predictions from the theoretical framework. Results confirm that, in the short-run, a negative shock to foreign funds effectively reduces the proportion of firms with access to intermediated finance (both local and foreign), whilst at the same time induces a substitution of funding by firms from foreign to local sources, thus effectively having a positive effect on domestic credit growth. Nonetheless, the estimated long-run relationship indicates that capital debt flows and domestic credit growth are positively related. These results have important policy implications, related with the potential impact on credit (and access) generated by the use of certain macro prudential measures.

Keywords: Principal-agent model; Capital flows; Credit; VEC Models. (search for similar items in EconPapers)
JEL-codes: C32 D82 E51 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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https://doi.org/10.1016/S0120-4483(14)70021-1

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Journal Article: Foreign Debt Flows and the Credit Market: A Principal Agent Approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000107:011976

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