Abstract
Recent episodes of strong growth in banks' credit to the private sector have been accompanied by large appreciations of the real exchange rates. I conjecture that such appreciations have been associated with cross-country interest rate differentials, and integrated financial markets generated increases in domestic liquidity. I also conjecture that real exchange rates alter the relative values of domestic and foreign collateral goods and thus they affect total financing available to a country. I use panel data for 91 countries from 1970 to 2000 to investigate the association between cross-country interest rate differentials, real exchange rate levels and private sector credit growth, through dynamic panel data techniques.
Acknowledgements
I am grateful to Ted Court, Ivailo Izvorski, Paul Kupiec and Rachel Van Elkan for useful comments and suggestions and to Gian Maria Milesi Ferretti for providing data.
The usual disclaimer applies.
Notes
The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board or its management.