Capital Inflows, Credit Growth, and Financial Systems

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