Capital inflows, exchange rate regimes and credit dynamics in emerging market economies

Abstract

This paper investigates the impact of the exchange rate regime (ERR) on the cycle of capital flows, the private credit growth rate and the level of dollarization in emerging market economies. We consider two different panels including 12 and 22 countries over the periods 1980-2010 and 1994-2008, respectively. We estimate a Panel Smooth Transition Regression (PSTR) model in order to assess whether the impact of ERR on credit dynamics is affected by the cyclical component of capital flows. Our findings are threefold. First, the ERR has no impact on the cyclical component of capital flows. Second, credit expansion is procyclical in economies with pegged curencies. Third, during capital inflows or low outflows periods, economies with fixed exchange rate regimes show a higher level of dollarization. When outflows are sizeable, ERR no longer impacts the level of dollarization. These results suggest that ERR should be an important variable in conceiving the policy mix to cope with domestic credit expansions and liability dollarization.JEL Classification: C33, E42, F31, O16

Asset Price Shock Response to Shock Capital Flow, Exchange Rate and Interest Rate: Case Study of 16 Emerging Market Countries

“…The results showed a positive relationship between the interest rate by asset prices. Empirically also according to research conducted by Boudias (2015) and Olaberria (2014) who found that the interest rate has a positive effect on the level of stock prices in a country.…”

“…The increase in the price level (inflation) which is a result of monetary expansion also led to the rise in asset prices. Empirically according to research conducted by (Sá et al, 2011;Tillmann, 2013;Boudias, 2015;Taguchi et al, 2015) showed that the positive effect of capital inflows on asset prices.…”

“…Application of extra loose monetary policy in developed countries such as quantitative easing contributes to increasing capital inflows. The policy was made to provide stimulus to the economy because in emerging markets have a higher rate of return, and supported by good economic performance (Boudias, 2015).…”

Measuring complexity in Brazilian economic crises

“…Here, slightly modified versions of the LMC and SDL measures are proposed for temporal series. Then, considering that capital fluxes are determinant to the economic health of an emerging country [ 18 ], oscillating drastically due to several political, social and economic changes, Brazilian macro-economical data are analyzed by calculating the LMC and SDL complexity measures, aiming to identify how their behavior is connected to crisis events.…”

Exchange Rate Volatility and Capital Inflows in Developing Economies

“…A number of social and macroeconomic indicators like foreign reserves, technology transfer, savings and investment are favorably influenced by the foreign capital inflows so capital inflows are necessary for developing economies to maintain the macroeconomic growth and stability (Levine, 2001).The capital inflows particularly for developing economies are considered as driver of economic growth (Lin, Andrews, Ghosh, & Ratasuk, 2014). They may support the developing economies in financial investment and strengthening the stock market which accelerate the economic growth (Boudias, 2014). Furthermore, the capital inflows boost up the market size, as foreign investors invest in local market the market size tends to increase.…”