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Open Economies Review

, Volume 27, Issue 4, pp 637–670 | Cite as

Capital Surges and Credit Booms: How Tight is the Relationship?

  • Puspa D. Amri
  • Greg M. Richey
  • Thomas D. Willett
Research Article

Abstract

It has been frequently argued that surges in capital inflows are a major cause of credit booms and banking crises in emerging market economies. This view suggests that there is little role that can be played by domestic policy to break this linkage. This need not be the case. We show that the linkage between surges and booms is not as strong as is often assumed. One problem with most previous studies is that a wide range of measures for both surges and booms has been used with little checking of the robustness of results. We deal with this issue by replicating 14 different measures of capital surges (gross and net) and 5 credit boom proxies from the literature on a sample of 46 countries from 1981–2010. A second difficulty is that some previous studies have not distinguished between the proportions of surges followed by booms and booms preceded by surges. We found substantial differences between these two relationships. While there is a good deal of variation in the individual correlations the vast majority of the calculated probabilities of a surge being followed by a credit boom fall within the range of 4 % to 13 %. Although the proportion of credit booms preceded by surges is higher, the correlations for both directions are much lower than are frequently assumed. While the probabilities of a surge being followed by a credit boom generally increased from the 1980s to the 1990s they fell again in the 2000s, suggesting the possibility that authorities have become better at limiting the adverse effects of surges on domestic credit growth.

Keywords

Capital surges Credit booms Capital inflows Emerging markets Financial crises 

JEL Classification

E44 E51 F30 F32 G15 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  • Puspa D. Amri
    • 1
  • Greg M. Richey
    • 2
    • 3
  • Thomas D. Willett
    • 4
  1. 1.Department of EconomicsIthaca CollegeIthacaUSA
  2. 2.Department of Accounting and FinanceCalifornia State University, San BernardinoSan BernardinoUSA
  3. 3.Claremont Institute for Economic Policy Studies (CIEPS)ClaremontUSA
  4. 4.Claremont Graduate University and Claremont McKenna College and Director of Claremont Institute for Economic Policy Studies (CIEPS)ClaremontUSA

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