The Role of U.S. Monetary Policy in Global Banking Crises

34 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 2019

See all articles by Ceyhun Bora Durdu

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System

Alex Martin

Board of Governors of the Federal Reserve System

Ilknur Zer

Board of Governors of the Federal Reserve System

Date Written: 2019-05-28

Abstract

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

Durdu, Ceyhun Bora and Martin, Alex and Zer, Ilknur, The Role of U.S. Monetary Policy in Global Banking Crises (2019-05-28). FEDS Working Paper No. 2019-039. Available at SSRN: https://ssrn.com/abstract=3423245 or http://dx.doi.org/10.17016/FEDS.2019.039

Ceyhun Bora Durdu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alex Martin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Ilknur Zer

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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