This paper finds that the composition of a country’s external debt provides valuable information about the likelihood of domestic credit booms and busts.
Authors: Stefan Avdjiev (Bank for International Settlements), Stephan Binder (Bank for International Settlements) and Ricardo Sousa (European Stability Mechanism)
We assess the role of external debt in shaping the dynamics of domestic credit cycles. Using quarterly data for 40 countries between 1980 and 2015, we examine four dimensions of external debt composition: instrument, sector, currency and maturity. We show that the first two dimensions provide valuable information about the likelihood of credit booms and busts. In particular, we find that a higher share of external bank lending in the form of bonds is associated with a greater likelihood of credit booms. Our results also reveal that credit busts tend to be associated with a lower share of interbank lending and a higher share of lending from banks to non-banks.
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JEL codes: E10, E40, E50, E47