Domestic Credit Growth and International Capital Flows


  • *This project has been generously supported by Fondation Banque de France and the Institute for New Economic Thinking. We thank Matthieu Bussiere, the participants at seminars at the Banque de France, Banca d'Espana and the Bank for International Settlements, and the three anonymous referees for helpful comments. We thank Barbara Pels, Caroline Mehigan, and Clemens Struck for research assistance. The opinions expressed in this paper are those of the authors and should not be attributed to the European Central Bank.


During the pre-crisis period, Europe experienced substantial cross-country variation in domestic credit growth and cross-border capital flows. We investigate the inter-relations between domestic credit growth and international capital flows during the period 1993–2008, with a special focus on the boom period of 2003–2008. We establish that domestic credit growth in European countries is strongly related to net debt inflows but not to net equity inflows. This pattern also holds for an extended sample of 54 advanced and emerging economies.