print Share page with AddThis

External debt composition and domestic credit cycles


Working papers

External debt composition and domestic credit cycles

Download PDF: Working Paper 28

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.

Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.

JEL codes: E10, E40, E50, E47

Source: European Stability Mechanism | Working Paper Series | Volume 2018 | No 28 | March 2018 | 50 Pages

Copyright © European Stability Mechanism, 2018 | All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorisation of the European Stability Mechanism.

Section for US QIB Investors Subscribe to ESM News