Determinants of domestic credit levels in emerging markets: the role of external factors

Abstract

This paper empirically examines the determinants of domestic credit expansion across a wide range of 24 emerging market economies. We use a dynamic panel data estimation technique to investigate the short-run and long-run effects of internal demand and external supply factors, external balance, different measures of trade openness and global uncertainty on domestic credit. We find that loose monetary policy in the domestic market, differences between domestic and global lending rates and real trade openness positively contribute to domestic credit levels. The findings also show that external balance and perceptions of global tail risk negatively affect domestic credit levels.