Reserve Accumulation and Bank Lending: Evidence from Korea

57 Pages Posted: 31 May 2018

See all articles by Youngjin Yun

Youngjin Yun

Bank of Korea - Economic Research Institute

Date Written: June 1, 2018

Abstract

Reserve accumulation is funded by the central bank's domestic borrowing as it always sterilizes reserve purchases by increasing domestic liabilities. The central bank borrowing could crowd out firms' borrowing under imperfect international capital mobility. I present a model that illustrates the mechanism and examine monthly balance sheets of Korean banks from September 2003 to August 2008 to find that bank lending to firms did decline after reserve accumulation. Controlling for individual effects and time effects, it is estimated that bank lending declined by 50 cents after one additional dollar of reserve accumulation. A causal relationship is verified by differences-in-differences identification. After one standard deviation reserve accumulation shock, primary dealer banks and foreign bank branches cut lending growth by 0.4 and 1.6 percentage points more than non-primary dealer banks and domestic banks, respectively.

Keywords: Foreign exchange reserves, Sterilization, Crowding-out, Bank loans

JEL Classification: E22, E58, F31

Suggested Citation

Yun, Youngjin, Reserve Accumulation and Bank Lending: Evidence from Korea (June 1, 2018). Bank of Korea WP 2018-15. Available at SSRN: https://ssrn.com/abstract=3188481 or http://dx.doi.org/10.2139/ssrn.3188481

Youngjin Yun (Contact Author)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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