DP11839 International Spillovers and Local Credit Cycles

Author(s): Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu
Publication Date: February 2017
Keyword(s): Bank credit, Capital Flows, Firm Heterogeneity, Risk premium, VIX
JEL(s): E0, F0, F1
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11839

We show that capital inflows are important drivers of domestic credit cycles using a firm-bank-loan level dataset for a representative emerging market. Instrumenting inflows by changes in global risk appetite (VIX), we find that a fall in VIX leads to a large decline in real borrowing rates and an expansion in credit supply. Estimates explain 40% of observed cyclical corporate credit growth. The OLS-elasticity of interest rates vis--vis capital inflows is smaller than the IV-elasticity. Banks with higher noncore funding offer relatively lower rates to low net worth firms, but do not extend more credit to them given collateral constraints