U.S. Monetary Policy and Emerging Markets Credit Cycles

45 Pages Posted: 5 Jun 2017 Last revised: 15 May 2018

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)

Date Written: May 10, 2018


Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, followed by a fast credit contraction of a similar magnitude upon reversal of the U.S. monetary policy stance. This result is robust across different geographies and industries, and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. EME local lenders do not offset the foreign bank capital flows, and U.S. monetary policy affects credit conditions for EME firms, both at the extensive and intensive margin. Consistent with a risk-driven credit-supply adjustment, we show that the spillover is stronger for riskier EMEs, and, within countries, for higher-risk firms.

Keywords: Global Business Cycle, Monetary Policy, Emerging Markets, Reaching for Yield

JEL Classification: E34, E52, F34, F44, G21

Suggested Citation

Bräuning, Falk and Ivashina, Victoria, U.S. Monetary Policy and Emerging Markets Credit Cycles (May 10, 2018). Available at SSRN: https://ssrn.com/abstract=2979862 or http://dx.doi.org/10.2139/ssrn.2979862

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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