Highlights :

• We estimate a Panel Smooth Transition Regression (PSTR) model in order to assess whether the impact of exchange rate regime (ERR) on credit dynamics is affected by the cyclical component of capital flows.
• ERR has no impact on the cyclical component of capital flows.
• Credit expansion is procyclical in economies with pegged curencies.
• Countries with pegged currencies experience a higher level of dollarization, but only during capital inflows or low outflows periods.

 Abstract :
This paper investigates the impact of the exchange rate regime (ERR) on the cycle of capital fl ows, the private credit growth rate and the level of dollarization in emerging market economies. We consider two different panels including 12 and 22 countries over the periods 1980-2010 and 1994-2008, respectively. We estimate a Panel Smooth Transition Regression (PSTR) model in order to assess whether the impact of ERR on credit dynamics is affected by the cyclical component of capital fl ows. Our fi ndings are threefold. First, the ERR has no impact on the cyclical component of capital fl ows. Second, credit expansion is procyclical in economies with pegged curencies. Third, during capital infl ows or low outfl ows periods, economies with fi xed exchange rate regimes show a higher level of dollarization. When outfl ows are sizeable, ERR no longer impacts the level of dollarization. These results suggest that ERR should be an important variable in conceiving the policy mix to cope with domestic credit expansions and liability dollarization.

 Keywords : Emerging market economies | capital flows | domestic credit | dollarization | PSTR

 JEL : C33, E42, F31, O16