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International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth

Yavuz Arslan () and Temel Taskin ()

Iktisat Isletme ve Finans, 2014, vol. 29, issue 341, 37-56

Abstract: The extent of interaction between international capital flows and macro-financial stability is an important and unsettled topic of debate. We contribute to this discussion by providing empirical evidence on the relationship between capital flows and domestic credit growth using a large cross-country panel dataset which includes both developed and developing economies. In the benchmark regression, we use a fixed effect model, and find a statistically significant and positive co-movement between the two variables, which is consistent with common wisdom and recent theory a la Bruno and Shin (2014). This empirical regularity is more pronounced in upper-middle income countries in comparison with the lower-middle and high income countries. The main results are robust to other econometric specifications and a variety of alternative measures for credit growth and capital flows.

Keywords: Cross-Border Capital Flows; Domestic Credit Growth; Macro-Financial Stability; Cross-Country Evidence (search for similar items in EconPapers)
JEL-codes: E51 F32 G15 (search for similar items in EconPapers)
Date: 2014
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