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Current account and credit growth: The role of household credit and financial depth

Mehmet Ekinci and Tolga Omay

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: Understanding the impact of financial variables on the current account balance is one of the priorities of academic literature and policymakers. Evidence from a broad panel of advanced and emerging countries shows that an increase in credit growth is associated with a significant deterioration in the current account balance. When we examine the roles of the components of credit, we find that an increase in household credit causes a significant decline in the current account balance, whereas an increase in business loans has no significant effect. Therefore, our findings indicate that the significant negative impact of credit growth on the current account balance is driven by household credit. Furthermore, we show that total and household credit growth rates have a stronger negative effect on the current account balance for lower levels of financial depth. Our results suggest that targeted policy measures that curb household credit growth might be more effective to reduce external imbalances particularly at the early stages of financial deepening.

Keywords: Credit growth; Current account balance; Global imbalances; Panel data (search for similar items in EconPapers)
JEL-codes: C33 F32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (12)

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Working Paper: Current Account and Credit Growth: The Role of Household Credit and Financial Depth (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:54:y:2020:i:c:s1062940820301418

DOI: 10.1016/j.najef.2020.101244

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