Cross － border Capital Flows，Domestic Credit Cycles，and Exchange Ｒate Ｒegimes Choice
Liu Jialin Lu Dong( School of Economics and M anagement，Beijing University of Chemical Technology;School of Finance，Ｒenmin University of China)
Summary:
The Central Financial Work Conference of 2023 proposes that efforts should be made to promotehigh － level financial opening － up，ensure financial and economic national security，and accelerate theconstruction of a financial power． In recent years，cross － border capital flows have become more frequent，andthere is an obvious global financial cycle． Simultaneously，the relationship between cross － border capital flowsand credit fluctuations in various countries has become closer． Historical experiences indicate that credit boomsoften precede financial disturbances like banking crises． In fact，exchange rates are crucial in linking cross －border capital flows，domestic credit cycles，and banking crises． Classical international finance theories suggestthat under free capital flows，a floating exchange rate regime can stabilize external shocks and ensure theindependence of central bank monetary policies． Under the background of global financial cycles，scholars haveengaged in hot discussions about whether floating exchange rate regimes act as stabilizers and how China shouldchoose its exchange rate regime and pursue high － quality financial opening － up． However，they have not yetreached a consensus． Therefore，it is necessary to explore the relationship among cross － border capital flows，domestic credit cycles，and banking crises under different exchange rate regimes． It could not only enhanceinternational financial theories and provide empirical guidance for the reform of the ＲMB exchange rate regime，but also could act as a key element in promoting the process of high － quality financial opening － up andensuring no systemic risks arise．
This paper collects domestic credit and cross － border capital flow data from 28 emerging marketeconomies，sourced from the International Monetary Fund and the Bank for International Settlements． The paperdivides credit booms and busts，constructs a Probit regression model to study the empirical relationship betweencross － border capital inflows and domestic credit booms or busts，and focuses on whether a floating exchangerate regime can act as a stabilizer． We find that non － direct investment debt inflows，especially cross － borderbank loan inflows，exhibit a pro － cyclical relationship with domestic credit． Compared to fixed exchange rateregimes，the pro － cyclical relationship between cross － border bank loan inflows and domestic credit weakens incountries with floating exchange rate regimes，indicating that floating exchange rates play a stabilizing role．However，the pro － cyclical relationship between bond inflows and domestic credit strengthens under floatingexchange rate regimes． Further analysis indicates that floating exchange rates can stabilize “good booms”thatdo not trigger banking crises but cannot suppress “bad booms”that end with banking crises． Thus，floatingexchange rate regimes need to be coordinated with other policies，such as tight macroprudential policies，toeffectively curb the occurrence of banking crises．
This paper makes the following contributions: First，unlike existing studies that consider how capitalinflows affect credit growth or analyze how capital inflows affect credit cycles from the perspective of debtstructures，this paper analyzes the relationship among cross － border capital inflows，domestic credit cycles，and banking crises within a unified framework． More importantly，this paper studies the relationship amongthese three elements from the perspective of exchange rate regimes，investigating whether floating exchange rateregimes can act as stabilizers． Second，existing research rarely explores the relationship between different typesof capital inflows and domestic credit fluctuations according to debt types and borrowing sectors． Avdjiev et al．( 2021) found that domestic credit cycles are related to the type of external debt and borrowing sectors but didnot further explore whether credit booms triggered by different types and sectors have different impacts onbanking crises，and also did not investigate the role of floating exchange rate regimes． This paper finds that thestabilizing role of floating exchange rate regimes depends on the type and borrowing sectors． Third，existingliterature has not explored the role of exchange rate regimes in stabilizing different types of credit booms and inpreventing crises． This paper finds that floating exchange rate regimes can only stabilize “good booms”butcannot stabilize“bad booms”that lead to crises． Cooperation with other policies ( such as macroprudentialpolicies) is needed to better play the stabilizing role，indicating that floating exchange rate regimes are not a“one － size － fits － all”solution．
Based on these conclusions，this paper has the following policy implications: First，emerging marketeconomies should closely monitor and avoid large － scale cross － border bank loan flows． Second，in the processof promoting financial opening － up and maintaining financial stability，each department should effectively guardagainst exchange rate risks and choose reasonable external financing methods． When increasing domestic non －banking sector financing through the international bond market，the cost of managing exchange rate risks for thenon － banking sector should be reduced through improving financial infrastructure． Third，emerging marketeconomies need to strike a balance in the choice of exchange rate regimes while promoting financial opening －up and maintaining financial stability． Crawling peg regimes and managed floating regimes may be betterchoices． Fourth，exchange rate regimes themselves have limited effectiveness in preventing systemic financialrisks． While maintaining a dual fluctuation of exchange rates，regulators should strengthen macroprudentialsupervision of the banking sector．Keywords: Capital Inflows，Domestic Credit Cycles，Credit Booms，Exchange Ｒate ＲegimesJEL Classification: F31，F34，F41