VOLATILITY OF INTERNATIONAL CAPITAL FLOWS AND CREDIT SUPPLY IN THE BRAZILIAN ECONOMY BETWEEN 1995 AND 2009

Abstract

The aim of this paper is to verify the relation between the volatility of international capital flows and the credit volume presented in the Brazilian economy from 1995 to 2009. The main argument is that in moments of reversion of expectations and international crises, when there is foreign capital flight, the banks increase their liquidity preference and reduce the credit supply in the domestic economy. Moreover, the profitability of Brazilian public bonds and its easier negotiation in secondary markets papers allows that the Brazilian banking system obtains high profitability levels from a flexible composition portfolio. Thus, by analyzing data from the financial account of the Brazilian balance of payments and the consolidated banking data, this paper verifies that, although the relationship between international capital flows and credit supply in the domestic economy is not direct, the role of banks in Brazil is subject to cyclical fluctuations in the international economy.