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... our analysis focuses on emerging markets, a snapshot of advanced economies suggests that lack of exchange rate flexibility may also play a role on credit expansions. Figure 4 below suggests that capital inflows may have also been associated with credit expansions in the euro zone since the mid-1990s. ...
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The Mundell-Fleming trilemma hypothesis stated that a country could not simultaneously achieve exchange rate stability, financial integration, and monetary independence. The fixed exchange rate policy, free capital mobility, and monetary independence are trade-offs and impossible to run simultaneously. This research aims to identify the combination...
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... Meanwhile, numerous studies have documented that capital inflows can be associated with credit booms, inflation, exchange rate appreciation, and overall economic growth (Caradelli, Elekdag, and Kose 2010;Kaminsky and Reinhart 1999;Kaminsky, Reinhart, and Végh 2005;Magud, Reinhart, and Vesperoni 2011;McKinnon and Pill 1996;Mendoza and Terrones 2012;Reinhart and Reinhart 2009;Reinhart and Rogoff 2011). However, there is still limited empirical discussion regarding the effects of capital inflows on inflation, encompassing not only the expansionary features discussed above but also the contractionary aspects of capital inflows. ...
... Reinhart and Reinhart (2009) and Caradelli, Elekdag, and Kose (2010) demonstrate that a surge in capital inflows leads to an increase in inflation and exchange rate appreciation in emerging markets or developed economies. Additionally, several previous studies have indicated that an expansion of capital inflows results in increased credit growth (Kaminsky and Reinhart 1999;Kaminsky, Reinhart, and Végh 2005;Magud, Reinhart, and Vesperoni 2011;McKinnon and Pill 1996;Mendoza and Terrones 2012;Reinhart and Rogoff 2011). ...
... Adedji et al. found that a change of one percentage point in Saudi Arabia's economic growth generates an average change of 0.6% points in the rest of GCC countries, controlling for other factors. economic fundamentals and provides a lower cost of financing, a surge in capital flows complicates macroeconomic management and creates financial risks (Magud, Reinhart, and Vesperoni 2012). In addition, the surge in capital flows and the high COP accompanied by loose monetary policy in the United States contributed to the acceleration of borrowing and lending and the exacerbation of financial cycles in the UAE. ...
The study demonstrates that UAE Vision 2021 was effective, evidenced by the outcomes of the historical growth accounting model and the nonlinear autoregressive distributed lag bounds test model. Additionally, the study finds, among other things, that during the UAE Vision 2021, a sudden change in fiscal policy, whether expansionary or contractionary, proved effective, particularly in the long run and that a sudden change in crude oil price has a limited impact on the economy; however, investment in physical capital showed mixed results. Moreover, the nonlinear autoregressive distributed lag bounds test model demonstrates the nonlinearity of the relationships between crude oil price, investment in physical capital, and fiscal policy vis-à-vis economic performance. The model demonstrates that crude oil price, fiscal policy, and investment in physical capital are cointegrated with economic performance, reverting to long-run equilibrium in the aftermath of a shock. Hence, the study recommends the adoption of fiscal rules, specifically targeting the structural primary balance. The targeting smooths the underlying commodity price, reduces procyclicality, improves sovereign wealth funds, and cushions the economy from external shocks.
... In the studies concentrating on determinants of credit growth beyond identifying the critical levels that lead to credit booms, the association between credit expansion and international capital flows is underlined and capital flows are often thought to be one of its main drivers (Hernandez and Landerretche, 1999;Sa, 2006;Furceri et al., 2011;Lane and Milesi-Ferretti, 2011;Calderon and Kubota, 2012;Magud et al., 2012;Mendoza and Terrones, 2012;Lane and McQuade, 2014;Rey, 2015;Gauvin et al. 2017;Igan and Tan, 2017). Among others, for instance, Lane and Milesi-Ferretti (2011) emphasize the rapid credit growth and high current account deficits in some economies during the pre-crisis period and raise the question regarding the interaction between domestic credit growth and capital flows. ...
Following the 2007-2009 global crisis, high credit growth became an issue of concern with an emphasis on its relationship with capital flows. It is argued that large and volatile international capital flows lead to credit expansion, which in turn, may cause economic and financial instabilities when it reaches excessive levels, particularly in developing countries. This paper aims to investigate the association between credit growth and capital inflows in the context of developing countries by using panel data analysis. The methodology employed in the study offers a number advantages by allowing for heterogeneity and cross-sectional dependence in the panel, while also considering the endogeneity issue. The overall results of the study provides evidence for the impact of capital inflows, more particularly other capital inflows, on credit growth in the sample. This finding suggests a more direct relationship between capital inflows and credit creation as other inflows mostly comprise international banking and trade credits. It is not surprising given the fact that banking sector has a critical role in the financial systems of developing countries. The significance of international dimension for credit creation through other capital inflows and the intermediary role of the banking system should have monetary policy implications, in the macroprudential or more conventional fashion.
The main aim of this paper is to identify the macroeconomic and bank-specific determinants of bank loans to private sector in North Macedonia during the period from Q4 2007 to Q3 2019. Economic growth theory and empirical studies indicate that bank loans to private sector is an important factor of economic growth, which is especially pronounced in countries where the financial system is dominated by banks. For that purpose, we develop a single-country regression analysis with the ARDL model using quarterly data to examine the effect of the identified determinants from both the demand and supply sides. The results show that deposits and bank efficiency have the most significant impact on bank loans to private sector, while non-performing loans negatively affect bank loans growth to private sector
This paper addresses the question whether income inequality is associated with credit booms, alongside other macroeconomic factors. We distinguish between the different types of credit booms—real estate credit booms, household credit booms, firm credit booms and credit booms that turn into crises. Furthermore, our analysis of a sample of 70 countries between 1990 and 2016 does not provide any evidence of credit booms driving income inequality. We observe that capital inflows increase the likelihood of credit boom occurrence, while countries experiencing high economic growth tend to have more credit booms. Finally, we note that credit booms are more frequent in countries with fixed exchange rate regimes.
Will capital controls enhance macroeconomic stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We will answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules. With capital controls in place, we find that indeterminacy depends upon how the central bank’s response to inflation and its response to the output gap coordinate with each other in the Taylor rule. When forward-looking, both passive and active monetary policy can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We show the existence of Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls. We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.