When Two Become One: Foreign Capital and Household Credit Expansion

70 Pages Posted: 6 Apr 2021 Last revised: 15 Aug 2023

See all articles by Lukas Diebold

Lukas Diebold

University of Mannheim

Björn Richter

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: August 15, 2023

Abstract

Rapid credit expansions predict lower output growth and banking crises, but does it matter who is financing them? To answer this question, we identify the ultimate counterparties financing credit expansions in a novel data set covering 33 countries. We find that foreign-financed household credit expansions predict lower future GDP growth and higher risk of crises, but domestically financed credit expansions do not. We link these patterns to depressed domestic demand driven by higher debt service payments to foreigners, reversals in foreign financing, and confirm the findings using an instrumental variable based on lending dynamics in the international banking network.

Keywords: Business cycles, capital flows, debt service, financial crises, global financial cycle, household debt

JEL Classification: E32, E44, F34, G01, G15, G51

Suggested Citation

Diebold, Lukas and Richter, Björn, When Two Become One: Foreign Capital and Household Credit Expansion (August 15, 2023). Available at SSRN: https://ssrn.com/abstract=3817595 or http://dx.doi.org/10.2139/ssrn.3817595

Lukas Diebold

University of Mannheim ( email )

Chair of Economic History
Mannheim, 68131
Germany

HOME PAGE: http://sites.google.com/view/lukas-diebold

Björn Richter (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, E-08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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