Capital Inflows, Exchange Rate Flexibility, and Domestic Credit

Protracted expansionary monetary policies in advanced countries have renewed the debate over policy options to cope with large capital inflows that drive credit expansions in emerging economies. In a forthcoming paper, we show that during capital inflow bonanzas credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes. Hence, carefully crafted macro-prudential measures may complement macroeconomic policies.