TY - JOUR AU - Magud,Nicolas E. AU - Reinhart,Carmen M. AU - Vesperoni,Esteban R. TI - Capital Inflows, Exchange Rate Flexibility, and Credit Booms JF - National Bureau of Economic Research Working Paper Series VL - No. 17670 PY - 2011 Y2 - December 2011 UR - http://www.nber.org/papers/w17670 L1 - http://www.nber.org/papers/w17670.pdf N1 - Author contact info: Nicolas Magud International Monetary Fund 700 19 Street NW Washington DC 20431 Tel: (202) 623-8497 Fax: (202) 589-8497 E-Mail: nmagud@imf.org Carmen M. Reinhart Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 Tel: 617 496 8643 E-Mail: carmen_reinhart@harvard.edu Esteban R. Vesperoni International Monetary Fund 700 19 Street NW Washington DC 20431 E-Mail: evesperoni@imf.org AB - The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks’ incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans. ER -