Monetary Policy and Global Banking

75 Pages Posted: 10 Apr 2017

See all articles by Falk Bräuning

Falk Bräuning

Federal Reserve Banks - Federal Reserve Bank of Boston

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2017

Abstract

When central banks adjust interest rates, the opportunity cost of lending in local currency changes, but—in absence of frictions—there is no spillover effect to lending in other currencies. However, when equity capital is limited, global banks must benchmark domestic and foreign lending opportunities. We show that, in equilibrium, the marginal return on foreign lending is affected by the interest rate differential, with lower domestic rates leading to an increase in local lending, at the expense of a reduction in foreign lending. We test our prediction in the context of changes in interest rates in six major currency areas.

Suggested Citation

Bräuning, Falk and Ivashina, Victoria, Monetary Policy and Global Banking (April 2017). NBER Working Paper No. w23316. Available at SSRN: https://ssrn.com/abstract=2949640

Falk Bräuning (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Victoria Ivashina

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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