Do capital flows change domestic credit allocation?

Anna Samarina and Dirk Bezemer

Journal of International Money and Finance, 2016, vol. 62, issue C, 98-121

Abstract: Since the 1990s, domestic bank credit has been reallocated away from lending to non-financial business and toward households. An expanding literature discusses negative effects on growth and stability of this change in credit allocation. We research its drivers. We hypothesize that if foreign capital flows into economies with few investment opportunities, it may substitute for domestic bank lending to non-financial business, so that bank balance sheets become more dominated by household lending. In GMM estimations on data for 36 economies over 1990–2011, we find evidence consistent with this mechanism. Foreign capital inflows into the non-bank sector (but not into the bank sector) are associated with lower shares of business lending in domestic bank portfolios. The association is weaker in economies with more investment opportunities, whether proxied by investment shares, current account surpluses, or EMU membership. Our results highlight the importance of sectoral destination in determining the effects of capital flows.

Keywords: Credit allocation; Capital inflows; Investment opportunities (search for similar items in EconPapers)
JEL-codes: F32 F36 G21 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (36)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:62:y:2016:i:c:p:98-121

DOI: 10.1016/j.jimonfin.2015.12.013

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