The Role of U.S. Monetary Policy in Global Banking Crises
34 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 2019
Date Written: 2019-05-28
We examine the role of U.S. monetary policy in global financial stability by using a cross-country database spanning the period from 1870-2010 across 69 countries. U.S. monetary policy tightening increases the probability of banking crises for those countries with direct linkages to the U.S., either in the form of trade links or significant share of USD-denominated liabilities. Conversely, if a country is integrated globally, rather than having a direct exposure, the effect is ambiguous. One possible channel we identify is capital flows: If the correction in capital flows is disorderly (e.g., sudden stops), the probability of banking crises increases. These findings suggest that the effect of U.S. monetary policy in global banking crises is not uniform and largely dependent on the nature of linkages with the U.S.
Keywords: banking crises, financial stability, monetary policy shocks, sudden stop
JEL Classification: G15, E44, E52, F42
Suggested Citation: Suggested Citation