Capital Inflows, Credit Growth, and Financial Systems

Abstract

Exploiting a granular panel dataset that breaks down capital inflows into FDI, portfolio and other categories, and distinguishes between credit to households and to corporations, we investigate the association between capital inflows and credit growth. We find that non-FDI inflows boost credit growth and increase the likelihood of credit booms in both household and corporate sectors. For household credit, the composition of inflows appears to be more important than financial system characteristics. In contrast, for corporate credit, both the composition and the financial system matter. Regardless of sectors and financial systems, other inflows are always linked to rapid credit growth. Firm-level data corroborate these findings and hint at a causal link: other inflows are related to more rapid credit growth for firms that rely more heavily on external financing. Further explorations on how capital inflows translate into more credit indicate that both demand and supply side factors play a role.