Divergent Monetary Policies and International Dollar Credit: Evidence from Bank‐Level Data

14 Pages Posted: 20 Feb 2018

See all articles by Dong He

Dong He

International Monetary Fund (IMF) - Monetary and Exchange Affairs Department

T. C. Wong

Hong Kong Monetary Authority - Research Department

Kelvin Ho

Hong Kong Monetary Authority

Andrew Tsang

Hong Kong Monetary Authority

Date Written: February 2018

Abstract

This paper uses a comprehensive and detailed bank‐level data set to study how the divergence of central bank balance sheet policy in the US vis‐à‐vis the euro area and Japan would affect the supply of international US dollar loans by global banks. Our empirical findings support the view that the contractionary effect of US monetary normalization on global dollar liquidity would be offset by an expansionary effect from continued supply of US dollar loans by euro area and Japanese banks. The net effect, however, is crucially dependent on the stability of global foreign exchange markets and investor perceptions of the default risks of global banks. Our findings show that there could be a significant contraction of the supply of international US dollar loans if and when the US monetary normalization coincides with a dislocation of the FX swap market and a rise of bank default risks. Our results are robust to alternative model specifications and different data sets.

Suggested Citation

He, Dong and Wong, Tak-Chuen and Ho, Kelvin and Tsang, Andrew, Divergent Monetary Policies and International Dollar Credit: Evidence from Bank‐Level Data (February 2018). Pacific Economic Review, Vol. 23, Issue 1, pp. 95-108, 2018. Available at SSRN: https://ssrn.com/abstract=3124670 or http://dx.doi.org/10.1111/1468-0106.12255

Dong He (Contact Author)

International Monetary Fund (IMF) - Monetary and Exchange Affairs Department ( email )

700 19th Street NW
Washington, DC 20431
United States
(202) 623-4062 (Phone)
(202) 589-4062 (Fax)

Tak-Chuen Wong

Hong Kong Monetary Authority - Research Department ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Kelvin Ho

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Andrew Tsang

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
Hong Kong
Hong Kong

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