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The Great Leveraging in the GIIPS Countries: Domestic Credit and Net Foreign Liabilities

Juan Cuestas and Karsten Staehr ()

No 2015012, Working Papers from The University of Sheffield, Department of Economics

Abstract: This paper analyses the relationship between domestic credit and foreign capital flows in the GIIPS countries during the Great Moderation before the global financial crisis. Cointegration analyses on the pre-crisis sample reveal that domestic credit and net foreign liabilities are cointegrated for Greece, Italy, Portugal and Spain, but not for Ireland. For the first four countries the long-run coefficient is in all cases around one, suggesting a close relationship between domestic leveraging and foreign capital inflows. Estimation of VECMs shows that the adjustment to deviations from the long-run relationship takes place through changes in domestic credit for Greece and Italy, while the adjustment is bidirectional for Spain and possibly also Portugal. These results suggest that “push” factors related to foreign capital inflows were important in the pre-crisis leveraging. The deleveraging after the crisis was largely unrelated to developments in foreign capital flows.

Keywords: leveraging; capital flows; financial crisis; cointegration (search for similar items in EconPapers)
JEL-codes: F32 E51 E44 C32 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2015-05
New Economics Papers: this item is included in nep-eec, nep-mac and nep-opm
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http://www.sheffield.ac.uk/economics/research/serps/articles/2015_012 First version, May 2015 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2015012

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