The sudden stops of debt‐led capital inflows, credit crunch, and exchange rate regimes

Abstract Based on the data of 70 developing countries during 1970–2015, we empirically study the relationship between international capital flows and domestic credit. We find that the sudden stop of debt‐led net capital inflows is significantly associated with a domestic credit crunch in developing countries. Moreover, we use the method of event analysis to discover that a flexible exchange rate regime offsets the severity of the credit crunch. These empirical findings are robust to different measures of sudden stops and endogeneity tests.